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LOAN PRODUCTION AND MONETARY POLICY

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

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Corresponding author
Address correspondence to: Miguel Casares, Departamento de Economía, Universidad Publica de Navarra, 31006, Pamplona, Spain; e-mail: mcasares@unavarra.es.
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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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Macroeconomic Dynamics
  • ISSN: 1365-1005
  • EISSN: 1469-8056
  • URL: /core/journals/macroeconomic-dynamics
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