Performance of interest rate rules under credit market imperfections |
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Authors: | Beatriz de Blas |
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Affiliation: | Departamento de A.E.: Teoría e Historia Económica, Universidad Autónoma de Madrid, 28049 Cantoblanco, Madrid, Spain |
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Abstract: | The stabilization effects of Taylor rules are analyzed in a limited participation framework with and without credit market imperfections in capital goods production. Financial frictions substantially amplify the impact of shocks, and also reinforce the stabilizing or destabilizing effects of interest rate rules on output. However, these effects are reversed relative to new Keynesian models: under limited participation, interest rate rules are stabilizing for productivity shocks, but imply an output-inflation tradeoff for demand shocks. Moreover, because financial frictions imply excessive fluctuation, stabilization via an interest rate rule can be a welfare-improving response to productivity shocks. |
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Keywords: | E13 E44 E5 |
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