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How should monetary policy respond to changes in financial conditions? In this paper we consider a simple model where firms are subject to idiosyncratic shocks which may force them to default on their debt. Firms’ assets and liabilities are denominated in nominal terms and predetermined when...
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funds from households to entrepreneurs subject to a well defined loan production function. The loan productivity shock is … treated as the supply side financial disturbance. Together with NT.s net worth shock that resembles the credit demand … simultaneous contraction of entrepreneurial net wealth. This new introduced shock has significant explanatory power for the …
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