Tight Money-Tight Credit: Coordination Failure in the Conduct of Monetary and Financial Policies / Julio A. Carrillo, Enrique G. Mendoza, Victoria Nuguer, Jessica Roldán-Peña.

Format:

Book

Author/Creator:

Carrillo, Julio A.

Contributor:

National Bureau of Economic Research.

Mendoza, Enrique G.

Nuguer, Victoria.

Roldán-Peña, Jessica.

Series:

Working Paper Series (National Bureau of Economic Research) no. w23151.

NBER working paper series no. w23151

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Tight Money-Tight Credit

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2017.

Summary:

Violations of Tinbergen rule and strategic interaction undermine monetary and financial 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 larger under a simple Taylor rule (STR) and a Taylor rule augmented with credit spreads (ATR) than under a dual rules regime (DRR) with a Taylor rule and a financial rule targeting spreads, by 264 and 138 basis points respectively. ATR and STR are tight money-tight credit regimes that respond too much to inflation and too little to spreads, and yield larger fluctuations in response to risk shocks. Reaction curves display shifts from strategic substitutes to complements in the choice of policy-rule elasticities. The Nash equilibrium is also a tight money-tight credit regime, with lower welfare than Cooperative equilibria and the DRR, but still higher than in the ATR and STR regimes.

Notes:

Print version record

February 2017.