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Federal Reserve Bank of Dallas
Globalization Institute Working Papers
Financal frictions and policy cooperation: a case with monopolistic banking and staggered loan contracts
Ippei Fujiwara
Yuki Teranishi
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.


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Ippei Fujiwara & Yuki Teranishi, Financal frictions and policy cooperation: a case with monopolistic banking and staggered loan contracts, Federal Reserve Bank of Dallas, Globalization Institute Working Papers 237, 01 Apr 2015.
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DOI: 10.24149/gwp237
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