Working Paper

Financal frictions and policy cooperation: a case with monopolistic banking and staggered loan contracts


Abstract: Do financial frictions call for policy cooperation? This paper investigates the implications of simple financial frictions, monopolistic banking together with staggered loan contracts, for monetary policy in open economies in the linear quadratic (LQ) framework. Welfare analysis shows that policy cooperation improves social welfare in the presence of such financial frictions. There also exist long-run gains from cooperation in addition to these by jointly stabilizing inefficient fluctuations over the business cycle, that are usually found in models with price rigidities. The Ramsey optimal steady states differ between cooperation and noncooperation. Such gains from cooperation arise irrespective of the existence of international lending or borrowing.

JEL Classification: F41; E50;

https://doi.org/10.24149/gwp237

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Bibliographic Information

Provider: Federal Reserve Bank of Dallas

Part of Series: Globalization Institute Working Papers

Publication Date: 2015-04-01

Number: 237

Pages: 73 pages