Credit Market Distortions, Asset Prices And Monetary Policy
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Credit Market Distortions, Asset Prices And Monetary Policy. / Pfajfar, Damjan ; Santoro, Emiliano.
In: Macroeconomic Dynamics, Vol. 18, No. 3, 2014, p. 631-650.Research output: Contribution to journal › Journal article › Research › peer-review
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TY - JOUR
T1 - Credit Market Distortions, Asset Prices And Monetary Policy
AU - Pfajfar, Damjan
AU - Santoro, Emiliano
PY - 2014
Y1 - 2014
N2 - We study the conditions that ensure rational expectations equilibrium (REE) determinacy and expectational stability (E-stability) in a standard sticky-price model augmented with the cost channel. We allow for varying degrees of pass-through of the policy rate to bank-lending rates. Strong cost-side effects limit the size of the policy rate response to inflation that is consistent with determinacy, so that inflation-targeting policies may not be capable of ensuring REE uniqueness. In this case it is advisable to combine policy rate responses to inflation with an appropriate reaction to the output gap and/or firm profitability. The negative reaction of real activity and asset prices to inflationary shocks adds a negative force to inflation responses that counteracts the borrowing cost effect and prevents expectations of higher inflation from becoming self-fulfilling
AB - We study the conditions that ensure rational expectations equilibrium (REE) determinacy and expectational stability (E-stability) in a standard sticky-price model augmented with the cost channel. We allow for varying degrees of pass-through of the policy rate to bank-lending rates. Strong cost-side effects limit the size of the policy rate response to inflation that is consistent with determinacy, so that inflation-targeting policies may not be capable of ensuring REE uniqueness. In this case it is advisable to combine policy rate responses to inflation with an appropriate reaction to the output gap and/or firm profitability. The negative reaction of real activity and asset prices to inflationary shocks adds a negative force to inflation responses that counteracts the borrowing cost effect and prevents expectations of higher inflation from becoming self-fulfilling
KW - Faculty of Social Sciences
KW - Monetary Policy
KW - Cost Channel
KW - Asset Prices
KW - Determinacy
KW - E-stability
KW - Monetary Policy
KW - Cost Channel
KW - Asset Prices
KW - Determinacy
KW - E-stability
U2 - 10.1017/S1365100512000557
DO - 10.1017/S1365100512000557
M3 - Journal article
VL - 18
SP - 631
EP - 650
JO - Macroeconomic Dynamics
JF - Macroeconomic Dynamics
SN - 1365-1005
IS - 3
ER -
ID: 43214000