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  • Miguel Casares (a1), Luca Deidda (a2) and Jose E. Galdon-Sanchez (a1)


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.


Corresponding author

Address correspondence to: Miguel Casares, Departamento de Economía, Universidad Publica de Navarra, 31006, Pamplona, Spain; e-mail:


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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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