Monetary Policy and the Financing of Firms

Arbeitspapier

How should monetary policy respond to changes in financial conditions? In this paper we consider a simple model where firms are subject to idiosyncratic shocks which may force them to default on their debt. Firms’ assets and liabilities are denominated in nominal terms and predetermined when shocks occur. Monetary policy can therefore affect the real value of funds used to finance production. Furthermore, policy affects the loan and deposit rates. In our model, allowing for short-term inflation volatility in response to exogenous shocks can be optimal; the optimal response to adverse financial shocks is to lower interest rates, if not at the zero bound, and to engineer a short period of controlled inflation; the Taylor rule may implement allocations that have opposite cyclical properties to the optimal ones.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: ECB Working Paper ; No. 1123

Classification and Topics

• Classification: Wirtschaft ; Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy: General (includes Measurement and Data) ; Financial Markets and the Macroeconomy ; Monetary Policy
• Subject: bankruptcy costs ; debt deflation ; financial stability ; optimal monetary policy ; price level volatility ; stabilization policy ; Geldpolitik ; Konjunktur ; Unternehmensfinanzierung ; Schock ; Insolvenz ; Zinspolitik ; Inflation ; Taylor-Regel ; Theorie

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): De Fiore, Fiorella ; Teles, Pedro ; Tristani, Oreste
• Event: Veröffentlichung
• (who): European Central Bank (ECB)
• (where): Frankfurt a. M.
• (when): 2009

Further information

• Handle: http://hdl.handle.net/10419/153557
• Last update: 10.03.2025, 11:43 AM CET