American Economic Journal:
Macroeconomics
ISSN 1945-7707 (Print) | ISSN 1945-7715 (Online)
Monetary Policy and the Financing of Firms
American Economic Journal: Macroeconomics
vol. 3,
no. 4, October 2011
(pp. 112–42)
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. (JEL G32, E31, E43, E44, E52)Citation
De Fiore, Fiorella, Pedro Teles, and Oreste Tristani. 2011. "Monetary Policy and the Financing of Firms." American Economic Journal: Macroeconomics, 3 (4): 112–42. DOI: 10.1257/mac.3.4.112Additional Materials
JEL Classification
- E31 Price Level; Inflation; Deflation
- E43 Interest Rates: Determination, Term Structure, and Effects
- E44 Financial Markets and the Macroeconomy
- E52 Monetary Policy
- G32 Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure
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