Monetary policy and the financing of firms

Fiorella de Fiore*, Pedro Teles, Oreste Tristani

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

20 Citations (Scopus)
23 Downloads

Abstract

How should monetary policy respond to changes in financial conditions? We consider a simple model where firms are subject to shocks which may force them to default on their debt. Firms' assets and liabilities are nominal and predetermined. Monetary policy can therefore affect the real value of funds used to finance production. In this model, allowing for inflation volatility in response to aggregate shocks can be optimal; the optimal response to adverse financial shocks is to lower interest rates and to engineer some inflation; and the Taylor rule may implement allocations that have opposite cyclical properties to the optimal ones.
Original languageEnglish
Pages (from-to)112-142
Number of pages31
JournalAmerican Economic Journal: Macroeconomics
Volume3
Issue number4
DOIs
Publication statusPublished - 2011

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