Monetary Policy and the Financing of Firms

Pedro Teles and Fiorella De Fiore
Authors registered in the RePEc Author Service: Oreste Tristani

Working Papers from Banco de Portugal, Economics and Research Department

Abstract: How should monetary policy respond to changes in financial conditions? In this paper we consider a simple model where firms are subject to idiosyncratic shocks which may force them to default on their debt. Firms’ assets and liabilities are denominated in nominal terms and predetermined when shocks occur. Monetary policy can therefore affect the real value of funds used to finance production. Furthermore, policy affects the loan and deposit rates. We find that maintaining price stability at all times is not optimal; that the optimal response to adverse financial shocks is to lower interest rates, if not at the zero bound, and engineer a short period of inflation; that the Taylor rule may implement allocations that have opposite cyclical properties to the optimal ones.

JEL-codes: D52 E20 E44 (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Monetary Policy and the Financing of Firms (2011)
Working Paper: Monetary Policy and the Financing of Firms (2009)
Working Paper: Monetary Policy and the Financing of Firms (2009)
Working Paper: Monetary Policy and the Financing of Firms (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:ptu:wpaper:w200917

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