Tight Money-Tight Credit: Coordination Failure in the Conduct of Monetary and Financial Policies

Julio Carrillo, Enrique Mendoza, Victoria Nuguer and Jessica Roldán-Peña
Additional contact information
Jessica Roldán-Peña: Banco de México (E-mail: jroldan@banxico.org.mx)

No 19-E-08, IMES Discussion Paper Series from Institute for Monetary and Economic Studies, Bank of Japan

Abstract: Violations of Tinbergen's Rule and strategic interaction undermine monetary and financial policies significantly in a New Keynesian model with the Bernanke-Gertler accelerator. Welfare costs of risk shocks are large because of efficiency losses and income effects of costly monitoring, but they are larger under a simple Taylor rule (STR) and a Taylor rule augmented with credit spreads (ATR) than under a dual rules regime (DRR) with a Taylor rule and a financial rule targeting spreads, by 264 and 138 basis points respectively. ATR and STR are tight money-tight credit regimes that respond too much to inflation and not enough to spreads, and yield larger fluctuations in response to risk shocks. Reaction curves display shifts from strategic substitutes to complements in the choice of policy-rule elasticities. The Nash equilibrium is also a tight money-tight credit regime, with welfare 30 basis points lower than in Cooperative equilibria and the DRR, but still sharply higher than in the ATR and STR regimes.

Keywords: Monetary policy; Financial frictions; Macroprudential policy; Leaning against the wind; Policy coordination (search for similar items in EconPapers)
JEL-codes: E3 E44 E52 G18 (search for similar items in EconPapers)
Date: 2019-07
New Economics Papers: this item is included in nep-cba, nep-dge, nep-gth, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Tight Money-Tight Credit: Coordination Failure in the Conduct of Monetary and Financial Policies (2021)
Working Paper: Tight Money-Tight Credit: Coordination Failure in the Conduct of Monetary and Financial Policies (2019)
Working Paper: Tight money - tight credit: coordination failure in the conduct of monetary and financial policies (2018)
Working Paper: Tight Money-Tight Credit: Coordination Failure in the Conduct of Monetary and Financial Policies (2017)
Working Paper: Tight Money-Tight Credit: Coordination Failure in the Conduct of Monetary and Financial Policies (2017)
Working Paper: Tight Money-Tight Credit: Coordination Failure in the Conduct of Monetary and Financial Policies (2017)
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