Year: 2016
Author: Michaelis, Jochen, Palek, Jakob
Credit and Capital Markets – Kredit und Kapital, Vol. 49 (2016), Iss. 1 : pp. 1–36
Abstract
There is growing empirical evidence that the strength of financial frictions differs across countries. Using the cost channel approach, we show how the introduction of (country-specific) financial frictions alters the optimal monetary responses to union-wide and national non-financial shocks in a New Keynesian model of a two-country monetary union. By causing a cost-push effect on inflation, financial frictions make monetary policy less effective in combating inflation. We show that the optimal response to the decline in effectiveness is a stronger use of the interest-rate instrument. On the other hand, the larger the differential of financial frictions across member states, the less aggressive will the optimal monetary policy be. For almost all parameter constellations, our welfare analysis suggests a clear-cut ranking of policy regimes: commitment outperforms the Taylor rule, the Taylor rule outperforms strict inflation targeting, and strict inflation targeting outperforms discretion.
Journal Article Details
Publisher Name: Global Science Press
Language: English
DOI: https://doi.org/10.3790/ccm.49.1.1
Credit and Capital Markets – Kredit und Kapital, Vol. 49 (2016), Iss. 1 : pp. 1–36
Published online: 2016-03
AMS Subject Headings: Duncker & Humblot
Copyright: COPYRIGHT: © Global Science Press
Pages: 36
Keywords: E31 E52 F41 financial frictions cost channel optimal monetary policy monetary union
Author Details
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Financial frictions and optimal stabilization policy in a monetary union
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https://doi.org/10.1016/j.econmod.2016.12.024 [Citations: 7] -
Optimal monetary and macroprudential policy in a currency union
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https://doi.org/10.1016/j.jimonfin.2019.01.008 [Citations: 7]
| Section Title | Page | Action | Price |
|---|---|---|---|
| Jochen Michaelis / Jakob Palek: Optimal Monetary Policy in a Currency Union: Implications of Country-specific Financial Frictions | 1 |