Monetary policy and growth with trend inflation and financial frictions

Olmos, Lorena and Sanso Frago, Marcos (2014): Monetary policy and growth with trend inflation and financial frictions.

Abstract

This paper studies the effects that conventional and unconventional monetary policies generate when endogenous growth, trend inflation and financial frictions are considered in a New Keynesian macroeconomic model. Financial variables play a key role in the determination of the steady state growth rate, given the value of the trend inflation. Calibrating the model following Gertler and Karadi (2011), long-run growth rate, welfare, normalized investment and financial wealth are maximized when trend inflation is 1.7% while leverage, external finance premium and marginal gain of the financial intermediaries are minimized. Finally, unconventional policies could extend their impact to the long run.

• Item Type: MPRA Paper
• Language: English
• Keywords: New Keynesian DSGE models, endogenous growth, financial frictions, trend inflation, unconventional monetary policy
• Subjects: E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O42 - Monetary Growth Models

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