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Published online by Cambridge University Press:  21 June 2017

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


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.

Copyright © Cambridge University Press 2017 

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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.



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