Hostname: page-component-848d4c4894-4rdrl Total loading time: 0 Render date: 2024-06-18T07:47:11.724Z Has data issue: false hasContentIssue false

LOAN PRODUCTION AND MONETARY POLICY

Published online by Cambridge University Press:  21 June 2017

Miguel Casares*
Affiliation:
Universidad Pública de Navarra
Luca Deidda
Affiliation:
Università di Sassari
Jose E. Galdon-Sanchez
Affiliation:
Universidad Pública de Navarra
*
Address correspondence to: Miguel Casares, Departamento de Economía, Universidad Publica de Navarra, 31006, Pamplona, Spain; e-mail: mcasares@unavarra.es.

Abstract

We examine optimal monetary policy in a New Keynesian model with unemployment and financial frictions where banks produce loans using equity as collateral. Firms and households demand loans to finance externally a fraction of their flows of expenditures. Our findings show amplifying business-cycle effects of a more rigid loan production technology. In the monetary policy analysis, the optimal rule clearly outperforms a Taylor-type rule. The optimized interest-rate response to the external finance premium turns significantly negative when either banking rigidities are high or when financial shocks are the only source of business cycle fluctuations.

Type
Articles
Copyright
Copyright © Cambridge University Press 2017 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

We are grateful to Banco de España for the grant on the project “Política monetaria en economías con fricciones financieras y bancarias.” Luca Deidda gratefully acknowledges financial support from the Italian Ministero dell'Università, PRIN, Fondazione Banco di Sardegna, and Fundacao para Ciencia ea Tecnologia, Portugal. Miguel Casares and Jose E. Galdon-Sanchez also acknowledge Spanish Ministerio de Economía for research project ECO2015-64330-P. We also thank Bassam Fattouh, Ettore Panetti, Paolo Vitale, William Barnett, and two anonymous referees for useful suggestions and discussions on a previous version of this paper.

References

REFERENCES

Altonji, Joseph G. (1986) Intertemporal substitution in labor supply: Evidence from micro data. Journal of Political Economy 94, S176S215.Google Scholar
Angeloni, Ignazio and Faia, Ester (2013) Capital regulation and monetary policy with fragile banks. Journal of Monetary Economics 60, 311324.Google Scholar
Bernanke, Ben and Gertler, Mark (1989) Agency costs, Net Worth, and business fluctuations. American Economic Review 79, 1431.Google Scholar
Bernanke, Ben, Gertler, Mark, and Gilchrist, Simon (1999) The financial accelerator in a quantitative business cycle framework. In Taylor, J. B. and Woodford, M. (eds.), Handbook of Macroeconomics, vol. 1, part 3, pp. 1341–93. Amsterdam: Elsevier.Google Scholar
Brunnermeier, Markus K., Eisenbach, Thomas M. and Sannikov, Yuliy (2012) Macroeconomics With Financial Frictions: A Survey. NBER working papers #18102.Google Scholar
Brunnermeier, Markus K. and Sannikov, Yuliy (2014) A macroeconomic model with a financial sector. American Economic Review 104, 379421.Google Scholar
Calvo, Guillermo A. (1983) Staggered pricing in a utility-maximizing framework. Journal of Monetary Economics 12, 383396.Google Scholar
Carlstrom, Charles T. and Fuerst, Timothy S. (1997) Agency costs, net worth, and business fluctuations: A computable general equilibrium analysis. American Economic Review 87, 893910.Google Scholar
Carlstrom, Charles T., Fuerst, Timothy S., Ortiz, Alberto and Paustian, Mathias (2014) Estimating contract indexation in a financial accelerator model. Journal of Economic Dynamics and Control 46, 130149.Google Scholar
Casares, Miguel (2007) Firm-specific or household-specific sticky wages in the New Keynesian model?. International Journal of Central Banking 3, 181240.Google Scholar
Casares, Miguel, Moreno, Antonio and Vázquez, Jesús (2014) An estimated New-Keynesian model with unemployment as excess supply of labor. Journal of Macroeconomics 40, 338359.Google Scholar
Christiano, Lawrence, Motto, Roberto and Rostagno, Massimo (2008) Shocks, structures or monetary policies? The Euro Area and US after 2001. Journal of Economic Dynamics and Control 32, 24762506.Google Scholar
Christiano, Lawrence, Motto, Roberto and Rostagno, Massimo (2014) Risk shocks. American Economic Review 104, 2765.Google Scholar
Cúrdia, Vasco and Woodford, Michael (2010) Credit spreads and monetary policy. Journal of Money, Credit, and Banking 42 (S1), 335.Google Scholar
Dixit, Avinash K. and Stiglitz, Joseph E. (1977) Monopolistic competition and optimum product diversity. American Economic Review 67, 297308.Google Scholar
Domeij, David and Flodén, Martin (2006) The labor-supply elasticity and borrowing constraints: Why estimates are biased. Review of Economic Dynamics 9, 242262.Google Scholar
Faia, Ester and Monacelli, Tommaso (2007) Optimal interest rate rules, asset prices, and credit frictions. Journal of Economic Dynamics and Control 31, 32283254.Google Scholar
Gertler, Mark L. and Karadi, Peter (2011) A model of unconventional monetary policy. Journal of Monetary Economics 58, 1734.Google Scholar
Giannoni, Marc and Woodford, Michael (2005) Optimal inflation targeting rules. In Bernanke, Ben S. and Woodford, Michael (eds.), The Inflation-Targeting Debate, pp. 93162. Chicago: University of Chicago Press.Google Scholar
Goodfriend, Marvin and McCallum, Bennett T. (2007) Banking and interest rates in monetary policy analysis: A quantitative exploration. Journal of Monetary Economics 54, 14801507.Google Scholar
Gopinath, Gita and Itskhoki, Oleg (2010) In search of real rigidities. In Acemoglu, D. and Woodford, M. (eds.), NBER Macroeconomics Annual, vol. 25, pp. 261309. Chicago: University of Chicago Press.Google Scholar
Kiyotaki, Nobuhiro and Moore, John (1997) Credit cycles. Journal of Political Economy 105, 211248.Google Scholar
Levin, Andrew T. and Williams, John C. (2003) Robust monetary policy with competing reference models. Journal of Monetary Economics 50, 945975.Google Scholar
McCallum, Bennett T. (1988) Robustness properties of a rule for monetary policy. Carnegie-Rochester Conference Series on Public Policy 29, 173203.Google Scholar
Pencavel, John (1986) Labor supply of men: A survey. In Ashenfelter, O. and Layard, R. (eds.), Handbook of Labor Economics, pp. 3102. Amsterdam: Elsevier.Google Scholar
Petrosky-Nadeau, Nicolas and Wasmer, Etienne (2015). Macroeconomic dynamics in a model of goods, labor and credit market frictions. Journal of Monetary Economics 72, 97113.Google Scholar
Ramsey, Frank P. (1927) A contribution to the theory of taxation. Economic Journal 37, 4761.Google Scholar
Smets, Frank R. and Wouters, Raf (2003) An estimated dynamic stochastic general equilibrium model of the Euro Area. Journal of the European Economic Association 1, 11231175.Google Scholar
Smets, Frank R. and Wouters, Raf (2007) Shocks and frictions in US business cycles: A Bayesian DSGE approach. American Economic Review 97, 586606.Google Scholar
Svensson, Lars E. O. and Woodford, Michael (2005). Implementing optimal policy through inflation-forecast targeting. In Bernanke, B. and Woodford, Michael (eds.), The Inflation-Targeting Debate, pp. 1983. Chicago: University of Chicago Press.Google Scholar
Taylor, John B. (1993) Discretion versus policy rules in practice. Carnegie-Rochester Conference Series on Public Policy 39, 195214.Google Scholar
Taylor, John B. (1999a) Staggered price and wage setting in macroeconomics. In Taylor, J. B. and Woodford, M. (eds.), Handbook of Macroeconomics, vol. 1B, pp. 10091050. Amsterdam: Elsevier.Google Scholar
Taylor, John B. (1999b) The robustness and efficiency of monetary policy rules as guidelines for interest rate setting by the European Central Bank. Journal of Monetary Economics 43, 655–80.Google Scholar
Townsend, Robert M. (1979) Optimal contracts and competitive markets with costly state verification. Journal of Economic Theory 21, 265293.Google Scholar
Villa, Stefania (2016) Financial frictions in the Euro Area and the United States: A Bayesian assesment. Macroeconomic Dynamics 20, 13131340.Google Scholar
Walsh, Carl E. (2010) Monetary Theory and Policy, 3rd ed. Cambridge, MA: MIT Press.Google Scholar
Wasmer, Etienne and Weil, Philippe (2004) The macroeconomics of labor and credit market imperfections. American Economic Review 94, 944963.Google Scholar
Woodford, Michael (1999) Commentary: How should monetary policy be conducted in an era of price stability? In New Challenges for Monetary Policy: A Symposium Sponsored by the Federal Reserve Bank of Kansas City. Kansas City: Federal Reserve Bank of Kansas City.Google Scholar
Woodford, Michael (2003) Interest and Prices: Foundations of a Theory of Monetary Policy. Princeton, NJ: Princeton University Press.Google Scholar