Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/179344
Authors: 
Carrillo, Julio A.
Roldán-Peña, Jessica
Mendoza, Enrique G.
Nuguer, Victoria
Year of Publication: 
2018
Series/Report no.: 
ECB Working Paper 2129
Abstract: 
Quantitative analysis of a New Keynesian model with the Bernanke-Gertler accelerator and risk shocks shows that violations of Tinbergen's Rule and strategic interaction between policymaking authorities undermine significantly the effectiveness of monetary and financial policies. Separate monetary and financial policy rules, with the latter subsidizing lenders to encourage lending when credit spreads rise, produce higher welfare and smoother business cycles than a monetary rule augmented with credit spreads. The latter yields a tight money-tight credit regime in which the interest rate responds too much to inflation and not enough to adverse credit conditions. Reaction curves for the choice of policy-rule elasticity that minimizes each authority's loss function given the other authority's elasticity are nonlinear, reflecting shifts from strategic substitutes to complements in setting policy-rule parameters. The Nash equilibrium is significantly inferior to the Cooperative equilibrium, both are inferior to a first-best outcome that maximizes welfare, and both produce tight money-tight credit regimes.
Subjects: 
financial frictions
monetary policy
financial policy
JEL: 
E44
E52
E58
Persistent Identifier of the first edition: 
ISBN: 
978-92-899-3234-9
Document Type: 
Working Paper

Files in This Item:
File
Size





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