Monetary Policy and the Financing of Firms
How should monetary policy respond to changes in financial conditions? In this paper we consider a simple model where firms need internal and external funds to produce and they fail if they are not able to repay their debts. Both internal funds and firm debt are nominal assets and are predetermined. Monetary policy can affect the real value of total funds available for production, as well as the real value of debt that needs to be repaid. Furthermore, policy also affects the loan and deposit rates. We find that price stability is not optimal; that the Taylor rule may implement allocations that have opposite cyclical properties to the optimal ones; that the lower bound for the nominal interest rate plays a key role.
Year of publication: |
2009
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Authors: | Teles, Pedro ; Tristani, Oreste ; Fiore, Fiorella De |
Institutions: | Society for Economic Dynamics - SED |
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