Working Paper: CEPR ID: DP13585
Authors: Fiorella De Fiore; Oreste Tristani
Abstract: We study the optimal combination of interest rate policy and unconventional monetary policy in a model where agency costs generate a spread between deposit and lending rates. We show that credit policy can be a powerful substitute for interest rate policy. In the face of shocks that negatively affect bank monitoring efficiency, unconventional measures insulate the real economy from further deterioration in financial conditions and it may be optimal for the central bank not to cut rates to zero. Thus, credit policy lowers the likelihood of hitting the zero bound constraint. Reductions in the policy rates without non-standard measures are sub-optimal as they force savers to inefficiently change their intertemporal consumption patterns.
Keywords: optimal monetary policy; unconventional policies; zero-lower bound; asymmetric information
JEL Codes: E44; E52; E61
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| credit policy (F34) | interest rate policy (E43) |
| financial shocks (F65) | bank monitoring efficiency (G21) |
| bank monitoring efficiency (G21) | effectiveness of credit policy (G32) |
| monitoring costs (Q52) | effectiveness of loans at lower rates (E43) |
| nonstandard measures (C31) | stabilization of the economy (E63) |
| optimal sequencing of policy responses (E63) | credit policy before interest rate cuts (G21) |