Working Paper: NBER ID: w23151
Authors: Julio A. Carrillo; Enrique G. Mendoza; Victoria Nuguer; Jessica Roldán
Abstract: Violations of Tinbergen rule and strategic interaction undermine monetary and financial policies in a New Keynesian model with the Bernanke-Gertler accelerator. Welfare costs of risk shocks are large because of efficiency losses and income effects of costly monitoring, but they are larger under a simple Taylor rule (STR) and a Taylor rule augmented with credit spreads (ATR) than under a dual rules regime (DRR) with a Taylor rule and a financial rule targeting spreads, by 264 and 138 basis points respectively. ATR and STR are tight money-tight credit regimes that respond too much to inflation and too little to spreads, and yield larger fluctuations in response to risk shocks. Reaction curves display shifts from strategic substitutes to complements in the choice of policy-rule elasticities. The Nash equilibrium is also a tight money-tight credit regime, with lower welfare than Cooperative equilibria and the DRR, but still higher than in the ATR and STR regimes.
Keywords: Monetary Policy; Financial Policy; Coordination; Welfare Costs; Risk Shocks
JEL Codes: E3; E44; E52; G18
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| violations of the Tinbergen rule (C52) | welfare costs (I30) |
| policy regime influences welfare outcomes (I38) | welfare costs (I30) |
| choice of policy regime (E60) | economic stability (E63) |
| elasticities of policy rules (H30) | welfare outcomes (I38) |
| Nash equilibrium (C72) | welfare losses (D69) |
| strategic interaction (C72) | welfare outcomes (I38) |