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American Economic Journal: Macroeconomics: Vol. 3 No. 4 (October 2011)

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Monetary Policy and the Financing of Firms

Article 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.3.4.112

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)

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Authors

De Fiore, Fiorella (European Central Bank)
Teles, Pedro (Bank of Portugal and Portuguese Catholic U)
Tristani, Oreste (European Central Bank)

JEL Classifications

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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American Economic Journal: Macroeconomics


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