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Performance of interest rate rules under credit market imperfections

Beatriz de Blas Pérez
Authors registered in the RePEc Author Service: Beatriz de Blas ()

UC3M Working papers. Economics from Universidad Carlos III de Madrid. Departamento de Economía

Abstract: The stabilization effects of Taylor rules are analyzed in a limited participation framework with and without credit market imperfections in capital goods production. Financial frictions substantially amplify the impact of shocks, and also reinforce the stabilizing or destabilizing effects of interest rate rules. However, these effects are reversed relative to New Keynesian models: under limited participation, interest rate rules are stabilizing for technology shocks, but imply an output-inflation tradeoff for demand shocks. Moreover, because financial frictions imply excessive fluctuation, stabilization via an interest rate rule can be a welfare-improving response to technology shocks.

Date: 2003-07
New Economics Papers: this item is included in nep-fin, nep-mac and nep-mon
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Related works:
Journal Article: Performance of interest rate rules under credit market imperfections (2009) Downloads
Working Paper: Performance of Interest Rate Rules under Credit Market Imperfections (2005) Downloads
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