Optimal Loan Loss Provisions and Welfare |
| |
| Affiliation: | 1. Department of Economics, Management and Institutions, University of Naples “Federico II”, Via Cinthia, Monte Sant’Angelo, 80126 Napoli, NA, Italy;2. Department of Business Studies and Research, Università degli Studi di Salerno, Via Giovanni Paolo II, 132, 84084 Fisciano, SA, Italy;1. Federal Reserve Bank of Richmond, 502 S. Sharp Street, Baltimore, MD 21201, United States;2. UMBC and OCC, 1000 Hilltop Circle, Baltimore, MD 21250, United States;1. Banco de Portugal, Lisboa, Portugal;2. Iscte- Instituto Universitário de Lisboa (ISCTE-IUL), Business Research Unit (BRU-IUL), Lisboa, Portugal |
| |
| Abstract: | We study the welfare implications of optimal loan loss provisions in a New Keynesian model featuring endogenous default risk and inflationary credit spreads. A unique link between provisions, credit spreads and inflation can be employed to enhance macroeconomic stability. Optimal provisions are most effective when dealing with cost-push financial shocks inherent in volatile spreads and the zero bound problem of monetary policy. Relaxing provisioning requirements following a recessionary financial disturbance consistently achieves the first-best outcome while nullifying the value of monetary policy under commitment. In contrast, deflationary demand shocks warrant an optimal rise in provisions, which inflate prices yet mildly contract output. |
| |
| Keywords: | optimal provisioning policies prudential policies credit cost channel zero lower bound welfare |
| 本文献已被 ScienceDirect 等数据库收录！ |
|
