Optimal Monetary Policy in a Financially Fragile Economy
- 5 January 2009
- journal article
- Published by Walter de Gruyter GmbH in The B.E. Journal of Macroeconomics
- Vol. 9 (1)
- https://doi.org/10.2202/1935-1690.1857
Abstract
This paper studies optimal monetary policy in an economy where …rms use external funds to …nance operational costs. It is shown that direct and indirect cost channels for monetary policy arise when …rms can default on borrowed funds. The direct cost channel calls for milder contractions in the face of in‡ationary pressures. The indirect cost channel, on the other hand, encourages policy conservatism and suggests stringent anti-in‡ationary measures. It is found that a super-inertial interest rate feedback rule can implement the globally optimal plan as the unique rational expectations equilibrium. JEL classi…cation: E52; E44; E53Keywords
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