Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/109686
Authors: 
Palek, Jakob
Year of Publication: 
2015
Series/Report no.: 
Joint Discussion Paper Series in Economics 06-2015
Abstract: 
Recent work on financial frictions in New Keynesian models suggest that there is a sizable spread between the risk-less interest rate and the borrowing rate. We analyze the optimal policy mix of monetary and fiscal authorities in a currency union with a country-specific credit spread by introducing a cost channel differential. The cost channel decreases the efficiency of monetary policy and increases the need for fiscal stabilization. We show that the importance of fiscal policy in stabilizing shocks increases, when there is a gap in the inflation differential due to a relative shock, an idiosyncratic shock or a credit spread differential. The welfare losses will be increasing (decreasing) in the size of the cost channel, if the nominal interest rate is a demand- (supply-) side instrument.
Subjects: 
cost channel
financial frictions
credit spreads
optimal monetary policy
fiscal policy
monetary union
JEL: 
E31
E52
E62
E63
Document Type: 
Working Paper

Files in This Item:
File
Size
567.92 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.