TY  - JOUR
AU  - Braggion,Fabio
AU  - Christiano,Lawrence J.
AU  - Roldos,Jorge
TI  - Optimal Monetary Policy in a 'Sudden Stop'
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 13254
PY  - 2007
Y2  - July 2007
UR  - http://www.nber.org/papers/w13254
L1  - http://www.nber.org/papers/w13254.pdf
N1  - Author contact info:
Fabio Braggion
Finance Department
Tilburg University
Room K 917
P.O. Box 90153
5000 LE, Tilburg
The Netherlands
E-Mail: F.Braggion@uvt.nl

Lawrence Christiano
Department of Economics
Northwestern University
2001 Sheridan Road
Evanston, IL 60208
Tel: 847/491-8231
Fax: 847/491-7001
E-Mail: l-christiano@northwestern.edu

Jorge Roldos
International Monetary Fund
700 19th Street, N.W.
Washington, D.C. 20431
E-Mail: jroldos@imf.org
AB  - In the wake of the 1997-98 financial crises, interest rates in Asia were raised immediately, and then reduced sharply. We describe an environment in which this is the optimal monetary policy. The optimality of the immediate rise in the interest rate is an example of the theory of the second best: although high interest rates introduce an inefficiency wedge into the labor market, they are nevertheless welfare improving because they mitigate distortions due to binding collateral constraints. Over time, as various real frictions wear off and the collateral constraint is less binding, the familiar Friedman forces dominate, and interest rates are optimally set as low as possible.
ER  -