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  • Harris Dellas (a1), Behzad Diba (a2) and Olivier Loisel (a3)

In this paper, we study the positive and normative implications of financial shocks in a standard New Keynesian model that includes banks and frictions in the market for bank capital. We show how such frictions influence materially the effects of bank liquidity shocks and the properties of optimal policy. In particular, they limit the scope for countercyclical monetary policy in the face of these shocks. A fiscal policy instrument can complement monetary policy by offsetting the balance-sheet effects of these shocks, and jointly optimal policies attain the same equilibrium that monetary policy (alone) could attain in the absence of equity-market frictions.

Corresponding author
Address correspondence to: Olivier Loisel, ENSAE, Timbre J120, 3 Avenue Pierre Larousse, 92245 Malakoff Cédex, France; e-mail:; URL:
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Macroeconomic Dynamics
  • ISSN: 1365-1005
  • EISSN: 1469-8056
  • URL: /core/journals/macroeconomic-dynamics
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