Loan commitments and optimal monetary policy

1 Optimal Monetary Policy

We re-examine optimal monetary policy when lump-sum taxes are unavailable. Under commitment, we show that, with alternative utility functions to that considered in Nicolini’s related analysis, the direction of the incentive to cheat may depend on the initial level of government debt, with low debt creating an incentive towards surprise deflation, but high debt the reverse. Under discretion, we ...

Modeling loan commitments ✩

Loan commitments represent more than 82 percent of all commercial and industrial loans by domestic banks. This paper develops a valuation model for loan commitments incorporating early exercise, multiple fees, partial exercise and credit risk. The model is analytically tractable and easy to implement. Using a sample of commercial paper backup credit lines from the Dealscan database, we show tha...

Optimal Monetary Stabilization Policy∗

Optimal Monetary Policy

This article studies optimal monetary policy when decision-makers in firms choose how much attention they devote to aggregate conditions. When the amount of attention that decision-makers in firms devote to aggregate conditions is exogenous, complete price stabilization is optimal only in response to shocks that cause efficient fluctuations under perfect information. When decision-makers in fir...

Discussion of “ Large Banks , Loan Rate Markup , and Monetary Policy ” ∗

Cuciniello and Signoretti (this issue, hereafter CS) provide a New Keynesian dynamic stochastic general equilibrium (NKDSGE) model with imperfect competition in the banking industry and collateral-constrained borrowers to address some important questions. How much does banking industry market structure amplify business cycles? How does strategic interaction between big banks and the central ban...