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NBER Working Papers and Publications
|July 2007||Optimal Monetary Policy in a 'Sudden Stop'|
with Fabio Braggion, Lawrence J. Christiano: w13254
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.
Published: Braggion, Fabio & Christiano, Lawrence J. & Roldos, Jorge, 2009.
"Optimal monetary policy in a [`]sudden stop',"
Journal of Monetary Economics,
Elsevier, vol. 56(4), pages 582-595, May.
citation courtesy of
|June 2002||Monetary Policy in a Financial Crisis|
with Lawrence J. Christiano, Christopher Gust: w9005
What are the economic effects of an interest rate cut when an economy is in the midst of a financial crisis? Under what conditions will a cut stimulate output and employment, and raise welfare? Under what conditions will a cut have the opposite e ffects? We answer these questions in a general class of open economy models, where a financial crisis is modeled as a time when collateral constraints are suddenly binding. We find that when there are frictions in adjusting the level of output in the traded good sector and in adjusting the rate at which that output can be used in other parts of the economy, then a cut in the interest rate is most likely to result in a welfare-reducing fall in output and employment. When these frictions are absent, a cut in the interest rate improves asset position...
Published: Christiano, Lawrence J., Christopher Gust and Jorge Roldos. "Monetary Policy In A Financial Crisis," Journal of Economic Theory, 2004, v119(1,Nov), 64-103. citation courtesy of