Optimal monetary policy with capital and a financial accelerator
Journal of Economic Dynamics and Control | Elsevier | Published : 2018
Whether there is a trade-off between price and financial stability is an open question. This paper characterises optimal monetary policy analytically in a New Keynesian economy with capital and a financial accelerator. In addition to stabilising inflation, there is an incentive to smooth volatility in the net worth of borrowers and this presents a trade-off for monetary policy. This trade-off can be eliminated if policymakers can additionally choose an optimal transfer to borrowers. Enriching the model with fire sales and countercyclical bankruptcy costs, there is also an incentive to smooth volatility in default and the capital stock. An optimal transfer to borrowers is not sufficient to el..View full abstract
This paper is a substantial revision of the first chapter of my PhD thesis for which I received financial support from the Reserve Bank of Australia (RBA). I am also very grateful to Klaus Adam, Kosuke Aoki, Gianluca Benigno, Tommaso Monacelli, Bruce Preston, Kevin Sheedy and to two anonymous referees for all of their helpful suggestions, and to seminar participants at the London School of Economics, Workshop on Macroeconomic Dynamics, RBA and Quantitative Economics workshops. The views expressed in this paper and any errors are my own.