Optimal Monetary Policy in a Model with Agency Costs

Carlstrom, Charles T.; Fuerst, Timothy S.; Paustian, Matthias

doi:10.1111/j.1538-4616.2010.00329.x

Cited by 109 publications

(122 citation statements)

References 23 publications

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“…Weaknesses in macroprudential policies mean monetary policy more likely needs to respond to financial conditions. Indeed, in models where macroprudential policy is absent or time invariant, but with financial "distortions" still present, optimal monetary policy responds to some degree to financial conditions, in addition to output and inflation (Curdia and Woodford, 2009, Carlstrom and Fuerst, 2010, Adam and Woodford, 2013.…”

Section: A Macroprudential and Monetary Policiesmentioning

confidence: 99%

An Overview of Macroprudential Policy Tools

2014

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Macroprudential policies -caps on loan to value ratios, limits on credit growth and other balance sheets restrictions, (countercyclical) capital and reserve requirements and surcharges, and Pigouvian levies -have become part of the policy paradigm in emerging markets and advanced countries alike. But knowledge is still limited on these tools. Macroprudential policies ought to be motivated by market failures and externalities, but these can be hard to identify. They can also interact with various other policies, such as monetary and microprudential, raising coordination issues. Some countries, especially emerging markets, have used these tools and analyses suggest that some can reduce procyclicality and crisis risks. Yet, much remains to be studied, including tools' costs  by adversely affecting resource allocations; how to best adapt tools to country circumstances; and preferred institutional designs, including how to address political economy risks. As such, policy makers should move carefully in adopting tools. JEL Classification Numbers: E43, E58, G18, G28

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Section: A Macroprudential and Monetary Policiesmentioning

confidence: 99%

An Overview of Macroprudential Policy Tools

2014

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“…Examples of this line of research can be found in Kiyotaki and Moore (1997), Carlstrom, Fuerst, and Paustian (2010), and Gertler and Kiyotaki (2010). Credit constraints arise because lenders cannot force borrowers to repay their debts unless the debts are secured by some form of collateral.…”

Section: A Selected Review Of the Literaturementioning

confidence: 99%

“…Over the past two decades, there have been important advances in the theoretical literature on the macroeconomic impact of financial frictions. Notable contributions to the literature include Kiyotaki and Moore (1997), Bernanke, Gertler, and Gilchrist (1999), Christiano, Ilut, Motto, and Rostagno (2010), Carlstrom, Fuerst, and Paustian (2010), Curdia and Woodford (2010) and Gertler and Kiyotaki (2010). This research shows that credit market frictions (due to information asymmetry, agency costs or collateral constraints) act as a financial accelerator that in turn leads to an amplification of business cycles, and highlights the mechanisms through which credit market conditions are likely to impact the real economy.…”

Section: Introductionmentioning

confidence: 99%

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Business Cycle Effects of Credit Shocks in a DSGE Model with Firm Defaults

Pesaran

2016

SSRN Journal

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This paper proposes a theoretical framework to analyze the relationship between credit shocks, firm defaults and volatility, and to study the impact of credit shocks on business cycle dynamics. Firms are identical ex ante but differ ex post due to different realizations of firm-specific technology shocks, possibly leading to default by some firms. The paper advances a new modelling approach for the analysis of firm defaults and financial intermediation that takes account of the financial implications of such defaults for both households and banks. Results from a calibrated version of the model suggest that, in the steady state, a firm's default probability rises with its leverage ratio and the level of uncertainty in the economy. A positive credit shock, defined as a rise in the loan-todeposit ratio, increases output, consumption, hours and productivity, and reduces the spread between loan and deposit rates. The effects of the credit shock tend to be highly persistent, even without price rigidities and habit persistence in consumption behavior. JEL classification: E32, E44, G21 Bank classification: Business fluctuations and cycles; Economic models; Credit and credit aggregates; Financial institutions RésuméLes auteurs proposent un modèle théorique pour l'analyse de la relation entre les chocs de crédit, les défaillances d'entreprises et la volatilité, ainsi que pour l'étude des effets de ces chocs sur la dynamique du cycle économique. Dans ce modèle, des entreprises identiques ex ante se différencient ex post en réponse aux chocs technologiques réalisés, qui sont propres à chaque entreprise et peuvent provoquer sa défaillance. Le nouveau modèle employé par les auteurs pour examiner les défaillances des firmes et l'intermédiation financière tient compte des conséquences financières de ces défaillances à la fois sur les ménages et sur les banques. Les résultats tirés d'une version étalonnée du modèle indiquent qu'à l'équilibre de long terme, la probabilité de défaut d'une entreprise augmente avec son ratio de levier et le degré d'incertitude dans l'économie. Un choc de crédit positif -à savoir une hausse du ratio des prêts aux dépôts -accroît la production, la consommation, le nombre d'heures travaillées et la productivité et réduit l'écart entre le taux prêteur et le taux de rémunération des dépôts. Les retombées du choc de crédit tendent à perdurer longtemps même en l'absence de rigidité des prix et de persistance des habitudes de consommation.

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“…1 Collaterals rise at high level of economic activity, making credit available and cheap, and the reverse happens at low level of economic activity. The debt to asset value ratio is predicted to fall in the 1 Theoretical literature has studied the amplifying eect of shocks near the steady state, for example, see Carlstrom, Fuerst (2009), and Curdia and Woodford (2009a,b). boom and rise in recessions.…”

Section: Introductionmentioning

confidence: 99%