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This paper develops a model featuring both a macroeconomic and a financial friction that speaks to the interaction between monetary and macro-prudential policies. There are two main results. First, real interest rate rigidities in a monopolistic banking system have an asymmetric impact on financial stability: they increase the probability of a financial crisis (relative to the case of flexible interest rate) in response to contractionary shocks to the economy, while they act as automatic macro-prudential stabilizers in response to expansionary shocks. Second, when the interest rate is the only available policy instrument, a monetary authority subject to the same constraints as private agents cannot always achieve a (constrained) efficient allocation and faces a trade-off between macroeconomic and financial stability in response to contractionary shocks. An implication of our analysis is that the weak link in the U.S. policy framework in the run up to the Global Recession was not excessively lax monetary policy after 2002, but rather the absence of an effective regulatory framework aimed at preserving financial stability.

Monetary policy --- Bank loans --- Global Financial Crisis, 2008-2009. --- Global Economic Crisis, 2008-2009 --- Subprime Mortgage Crisis, 2008-2009 --- Financial crises --- Bank credit --- Loans --- Monetary management --- Economic policy --- Currency boards --- Money supply --- Econometric models. --- Banks and Banking --- Finance: General --- Economic Theory --- Industries: Financial Services --- Macroeconomics --- Financial Markets and the Macroeconomy --- Monetary Policy --- Policy Objectives --- Policy Designs and Consistency --- Policy Coordination --- Banks --- Depository Institutions --- Micro Finance Institutions --- Mortgages --- General Financial Markets: Government Policy and Regulation --- Financial Economics --- Interest Rates: Determination, Term Structure, and Effects --- Financial Crises --- Finance --- Banking --- Economic theory & philosophy --- Economic & financial crises & disasters --- Financial sector stability --- Financial frictions --- Central bank policy rate --- Financial sector policy and analysis --- Economic theory --- Financial services --- Collateral --- Financial institutions --- Global financial crisis of 2008-2009 --- Financial services industry --- Banks and banking --- Economic forecasting --- Interest rates --- Global Financial Crisis, 2008-2009 --- United States

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This paper develops a model featuring both a macroeconomic and a financial friction that speaks to the interaction between monetary and macro-prudential policy and to the role of U.S. monetary and regulatory policy in the run up to the Great Recession. There are two main results. First, real interest rate rigidities in a monopolistic banking system increase the probability of a financial crisis (relative to the case of flexible interest rate) in response to contractionary shocks to the economy, while they act as automatic macro-prudential stabilizers in response to expansionary shocks. Second, when the interest rate is the only available policy instrument, a monetary authority subject to the same constraints as private agents cannot always achieve a (constrained) efficient allocation and faces a trade-off between macroeconomic and financial stability in response to contractionary shocks. An implication of our analysis is that the weak link in the U.S. policy framework in the run up to the Global Recession was not excessively lax monetary policy after 2002, but rather the absence of an effective second policy instrument aimed at preserving financial stability.

Zonder onderwerpscode: economie

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Credit spreads rise after a monetary policy tightening, yet spread reactions are heterogeneous across firms. Exploiting information from a panel of corporate bonds matched with balance sheet data for U.S. non-financial firms, we document that firms with high leverage experience a more pronounced increase in credit spreads than firms with low leverage. A large fraction of this increase is due to a component of credit spreads that is in excess of firms' expected default. Our results suggest that frictions in the financial intermediation sector play a crucial role in shaping the transmission mechanism of monetary policy.

Business and Economics --- Macroeconomics --- International Economics --- Financial Markets and the Macroeconomy --- Monetary Policy, Central Banking, and the Supply of Money and Credit: General --- Economic & financial crises & disasters --- Economics of specific sectors --- Financial crises --- Economic sectors --- Currency crises --- Informal sector --- Economics

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Are uncertainty shocks a major source of business cycle fluctuations? This paper studies the effect of a mean preserving shock to the variance of aggregate total factor productivity (macro uncertainty) and to the dispersion of entrepreneurs' idiosyncratic productivity (micro uncertainty) in a financial accelerator DSGE model with sticky prices. It explores the different mechanisms through which uncertainty shocks are propagated and amplified. The time series properties of macro and micro uncertainty are estimated using U.S. aggregate and firm-level data, respectively. While surprise increases in micro uncertainty have a larger impact on output than macro uncertainty, these account for a small (non-trivial) share of output volatility.

Labor --- Macroeconomics --- Money and Monetary Policy --- Production and Operations Management --- General Aggregative Models: General --- Business Fluctuations --- Cycles --- Financial Markets and the Macroeconomy --- Production --- Cost --- Capital and Total Factor Productivity --- Capacity --- Labor Demand --- Macroeconomics: Consumption --- Saving --- Wealth --- Price Level --- Inflation --- Deflation --- Monetary Policy, Central Banking, and the Supply of Money and Credit: General --- Labour --- income economics --- Monetary economics --- Total factor productivity --- Self-employment --- Consumption --- Sticky prices --- Credit --- National accounts --- Prices --- Money --- Industrial productivity --- Self-employed --- Economics --- United States