Output Gap in Presence of Financial Frictions and Monetary Policy Trade-offs

 
Author/Editor: Francesco Furlanetto ; Paolo Gelain ; Marzie Taheri Sanjani
 
Publication Date: July 18, 2014
 
Electronic Access: Free Full text (PDF file size is 763KB).
Use the free Adobe Acrobat Reader to view this PDF file

 
Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate
 
Summary: The recent global financial crisis illustrates that financial frictions are a significant source of volatility in the economy. This paper investigates monetary policy stabilization in an environment where financial frictions are a relevant source of macroeconomic fluctuation. We derive a measure of output gap that accounts for frictions in financial market. Furthermore we illustrate that, in the presence of financial frictions, a benevolent central bank faces a substantial trade-off between nominal and real stabilization; optimal monetary policy significantly reduces fluctuations in price and wage inflations but fails to alleviate the output gap volatility. This suggests a role for macroprudential policies.
 
Series: Working Paper No. 14/128
Subject(s): Economic growth | Business cycles | Monetary policy | Macroprudential Policy | Econometric models

 
English
Publication Date: July 18, 2014
ISBN/ISSN: 9781498305327/1018-5941 Format: Paper
Stock No: WPIEA2014128 Pages: 44
Price:
US$18.00 (Academic Rate:
US$18.00 )
 
 
Please address any questions about this title to publications@imf.org