Abstract

The basic (representative-household) New Keynesian model of the monetary transmission mechanism is extended to allow for a spread between the interest rate available to savers and borrowers, and investigate the consequences of a variable credit spread for the effects of a variety of shocks, and for optimal policy responses to those shocks. A simple target criterion continues to provide a good approximation to optimal policy. Such a “flexible inflation target” can be implemented by a central-bank reaction function that is similar to a forward-looking Taylor rule, but adjusted for changes in current and expected future credit spreads.

Talk to us

Join us for a 30 min session where you can share your feedback and ask us any queries you have

Schedule a call

Disclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.