Technical Report Optimal Policy Analysis in a New Keynesian Economy with Credit Market Search


16-302017-02 , GRIPS Policy Research Center
To reveal a policy mandate for financial stability, we introduce a frictional credit market with a search and matching process into a standard New Keynesian model with nominal rigidities in the goods market, and then investigate optimal policy under financial frictions. We show that a second-order approximation of social welfare includes terms for credit, in addition to terms for inflation and consumption, so that any optimal policy must hold responsibility for financial and price stabilities. We highlight this issue by considering several tools for monetary and macroprudential policy. We find that optimal monetary policy requires keeping the credit market countercyclical against the real economy. Also, optimal macroprudential policy, which poses constraints on supply and demand sides of credit, reduces excessive variations in lending and contributes to both financial and price stabilities.
JEL Classification Codes: E44, E52, E61
Previously circulated under the title “Welfare Analysis of Policy Measures for Financial Stability,”March 2013.
Fujimoto gratefully acknowledges financial support from JSPS KAKENHI No. 26780114.
Teranishi gratefully acknowledges financial support from JSPS KAKENHI No. 26780153.
Seimeikai Foundation Research Grant
Murata Science Foundation Research Grant

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