scholarly journals Optimal Monetary Policy with Uncertainty About Financial Frictions

2006 ◽  
Author(s):  
Richhild Moessner
Keyword(s):  
Monetary Policy ◽  
Financial Frictions ◽  
Optimal Monetary Policy

scholarly journals Monetary Policy for a Bubbly World

2020 ◽  
Author(s):  
Vladimir Asriyan ◽  
Luca Fornaro ◽  
Alberto Martin ◽  
Jaume Ventura
Keyword(s):  
Monetary Policy ◽  
Private Sector ◽  
Central Bank ◽  
Financial Frictions ◽  
Optimal Monetary Policy ◽  
Future Value ◽  
Money Creation ◽  
The Creation

Abstract What is the role of monetary policy in a bubbly world? To address this question, we study an economy in which financial frictions limit the supply of assets. The ensuing scarcity generates a demand for “unbacked” assets, i.e., assets that are backed only by the expectation of their future value. We consider two types of unbacked assets: bubbles, which are created by the private sector, and money, which is created by the central bank. Bubbles and money share many features, but they also differ in two crucial respects. First, while the rents from the creation of bubbles accrue to entrepreneurs and foster investment, the rents from money creation accrue to the central bank. Second, while bubbles are driven by market psychology, and can rise and fall according to the whims of the market, money is under the control of the central bank. We characterize the optimal monetary policy and show that, through its ability to supply assets, monetary policy plays a key role in the bubbly world. The model sheds light on the recent expansion of central bank liabilities in response to the bursting of bubbles.

scholarly journals Optimal Simple Objectives for Monetary Policy when Banks Matter

2020 ◽  
Vol 20 (244) ◽  
Author(s):  
Lien Laureys ◽  
Roland Meeks ◽  
Boromeus Wanengkirtyo
Keyword(s):  
Monetary Policy ◽  
Resource Utilization ◽  
Euro Area ◽  
Inflation Targeting ◽  
Financial Frictions ◽  
Bank Credit ◽  
Optimal Monetary Policy ◽  
Trade Off ◽  
Welfare Benefits ◽  
Financing Frictions

We reconsider the design of welfare-optimal monetary policy when financing frictions impair the supply of bank credit, and when the objectives set for monetary policy must be simple enough to be implementable and allow for effective accountability. We show that a flexible inflation targeting approach that places weight on stabilizing inflation, a measure of resource utilization, and a financial variable produces welfare benefits that are almost indistinguishable from fully-optimal Ramsey policy. The macro-financial trade-off in our estimated model of the euro area turns out to be modest, implying that the effects of financial frictions can be ameliorated at little cost in terms of inflation. A range of different financial objectives and policy preferences lead to similar conclusions.

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