Tight Money-Tight Credit: Coordination Failure in the Conduct of Monetary and Financial Policies
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Julio A. Carrillo
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Enrique G. Mendoza
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Victoria Nuguer
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Jessica Roldán-Peña
- American Economic Journal: Macroeconomics (Forthcoming)
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 in
ation (spreads). The Nash equilibrium of monetary
and financial policies is also tight money-tight credit but it dominates ATR and STR.
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