NDLI: Output Gap, Monetary Policy Trade-offs, and Financial Frictions

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Output Gap, Monetary Policy Trade-offs, and Financial Frictions

Content Provider	Scilit
Author	Furlanetto, Francesco Gelain, Paolo Sanjani, Marzie Taheri
Copyright Year	2020
Description	Journal: SSRN Electronic Journal This paper investigates how the presence of pervasive financial frictions and large financial shocks changes the optimal monetary policy prescriptions and the estimated dynamics in a New Keynesian model. We find that financial factors affect the optimal policy only to some extent. A policy of nominal stabilization (with a particular focus on targeting wage inflation) is still the optimal policy, although the central bank is now unable to fully stabilize economic activity around its potential level. In contrast, the presence of financial frictions and financial shocks crucially changes the size and shape of the estimated output gap and the relative importance of different shocks in driving economic fluctuations, with financial shocks absorbing explanatory power from labor supply shocks.
Related Links	https://norges-bank.brage.unit.no/norges-bank-xmlui/bitstream/11250/2495583/1/working_paper_8_17.pdf https://papers.ssrn.com/sol3/Delivery.cfm?abstractid=3547598
ISSN	10914358
e-ISSN	15565068
DOI	10.2139/ssrn.3547598
Journal	SSRN Electronic Journal
Language	English
Publisher	Elsevier BV
Publisher Date	2020-02-15
Access Restriction	Open
Subject Keyword	Journal: SSRN Electronic Journal Financial Frictions Output Gap Monetary Policy
Content Type	Text
Resource Type	Article
Subject	Public Health, Environmental and Occupational Health Psychiatry and Mental Health

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