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.
Carrillo, Julio A., Enrique G. Mendoza, Victoria Nuguer, and Jessica Roldán-Peña.
"Tight Money-Tight Credit: Coordination Failure in the Conduct of Monetary and Financial Policies."
American Economic Journal: Macroeconomics,
General Aggregative Models: Keynes; Keynesian; Post-Keynesian
Price Level; Inflation; Deflation
Interest Rates: Determination, Term Structure, and Effects
Financial Markets and the Macroeconomy
Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy