Bank capital, asset prices, and monetary policy
By: David Aikman and Matthias Paustian
Contributors: Paustian, Matthias; Bank of England
Series: Working paper -- no. 305; Working paper (Bank of England : Online) -- no. 305.
Publisher: Bank of England
Published: 2006
Place of publication: London
Language: eng
Format: [electronic resource] /
Description: "We study a general equilibrium model in which informational frictions impede entrepreneurs' ability to borrow and banks' ability to intermediate funds. These financial market frictions are embedded in an otherwise-standard dynamic New Keynesian model. We find that exogenous shocks have an amplified and more persistent effect on output and investment, relative to the case of perfect capital markets. The chief contribution of the paper is to analyse how these financial sector imperfections--in particular, those relating to the banking sector--modify our understanding of optimal monetary policy. Our main finding is that optimal monetary policy tolerates only a very small amount of inflation volatility. Given that similar results have been reported for models that abstract from banks, we conclude that assigning a non-trivial role for banks need not materially affect the properties of optimal monetary policy."--Bank of England web site.
Notes: Title from PDF file as viewed on Oct. 16, 2006

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