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Performance of Interest Rate Rules under Credit Market Imperfections

Beatriz de Blas ()

No 16/05, Faculty Working Papers from School of Economics and Business Administration, University of Navarra

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 productivity 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 productivity shocks.

Keywords: financial frictions; Taylor rules; limited participation; stabilization policy. (search for similar items in EconPapers)
JEL-codes: E13 E44 E5 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2005-11-01
New Economics Papers: this item is included in nep-mac and nep-mon
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http://www.unav.edu/documents/10174/6546776/1132586205_wp1605.pdf (application/pdf)

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 (2003) Downloads
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