Home » Output Gap in Presence of Financial Frictions and Monetary Policy Trade-Offs by Francesco Furlanetto
Output Gap in Presence of Financial Frictions and Monetary Policy Trade-Offs Francesco Furlanetto

Output Gap in Presence of Financial Frictions and Monetary Policy Trade-Offs

Francesco Furlanetto

Published January 1st 2014
ISBN : 9781322071084
ebook
45 pages
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 About the Book 

The recent global financial crisis illustrates that financial frictions are a significant source of volatility in the economy. This paper investigates monetary policy stabilization in an environment where financial frictions are a relevant source ofMoreThe recent global financial crisis illustrates that financial frictions are a significant source of volatility in the economy. This paper investigates monetary policy stabilization in an environment where financial frictions are a relevant source of macroeconomic fluctuation. We derive a measure of output gap that accounts for frictions in financial market. Furthermore we illustrate that, in the presence of financial frictions, a benevolent central bank faces a substantial trade-off between nominal and real stabilization- optimal monetary policy significantly reduces fluctuations in price and wage inflations but fails to alleviate the output gap volatility. This suggests a role for macroprudential policies.