Tight Money-Tight Credit: Coordination Failure in the Conduct of Monetary and Financial Policies
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Abstract
Violations of Tinbergen's rule and strategic interaction undermine stabilization policies in a New Keynesian model with the Bernanke-Gertler accelerator. Welfare costs of risk shocks are large because of efficiency losses and income effects of costly monitoring, but they are much larger under a simple Taylor rule (STR) or a Taylor rule augmented with credit spreads (ATR) than with a Taylor rule and a separate financial rule targeting spreads. ATR and STR are tight money-tight credit regimes responding too much (little) to inflation (spreads). The Nash equilibrium of monetary and financial policies is also tight money-tight credit but it dominates ATR and STR.Citation
Carrillo, Julio A., Enrique G. Mendoza, Victoria Nuguer, and Jessica Roldán-Peña. 2021. "Tight Money-Tight Credit: Coordination Failure in the Conduct of Monetary and Financial Policies." American Economic Journal: Macroeconomics, 13 (3): 37-73. DOI: 10.1257/mac.20180321Additional Materials
JEL Classification
- E12 General Aggregative Models: Keynes; Keynesian; Post-Keynesian
- E31 Price Level; Inflation; Deflation
- E43 Interest Rates: Determination, Term Structure, and Effects
- E44 Financial Markets and the Macroeconomy
- E52 Monetary Policy
- E63 Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
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