Optimal Monetary Policy in a 'Sudden Stop' / Fabio Braggion, Lawrence J. Christiano, Jorge Roldos.

Format:

Book

Author/Creator:

Braggion, Fabio.

Contributor:

National Bureau of Economic Research.

Christiano, Lawrence J.

Roldos, Jorge.

Series:

Working Paper Series (National Bureau of Economic Research) no. w13254.

NBER working paper series no. w13254

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2007.

Summary:

In the wake of the 1997-98 financial crises, interest rates in Asia were raised immediately, and then reduced sharply. We describe an environment in which this is the optimal monetary policy. The optimality of the immediate rise in the interest rate is an example of the theory of the second best: although high interest rates introduce an inefficiency wedge into the labor market, they are nevertheless welfare improving because they mitigate distortions due to binding collateral constraints. Over time, as various real frictions wear off and the collateral constraint is less binding, the familiar Friedman forces dominate, and interest rates are optimally set as low as possible.

Notes:

Print version record

July 2007.