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Credit frictions, fiscal imbalances, monetary policy autonomy, and monetary policy rules

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  • Waheed, Farah
  • Abdul Rashid,

Abstract

The current study mathematically derives the monetary policy reaction function (MPRF) by incorporating credit spreads, fiscal imbalances, and monetary policy autonomy. The policy reaction function (PRF) has been derived in the framework of Dynamic Stochastic General Equilibrium (DSGE) model. The model clearly states that capital controls allow the central authorities to focus on the stability of domestic prices instead of worrying about capital outflows. The results of the calibrated model predict that credit spread, fiscal imbalances, and monetary policy autonomy significantly affect the rate of interest. The estimates suggest that most of the variability in output, inflation, and the interest rate occurs due to supply and credit spread shocks.

Suggested Citation

  • Waheed, Farah & Abdul Rashid,, 2021. "Credit frictions, fiscal imbalances, monetary policy autonomy, and monetary policy rules," The Journal of Economic Asymmetries, Elsevier, vol. 23(C).
    • Handle: RePEc:eee:joecas:v:23:y:2021:i:c:s1703494920300396
    DOI: 10.1016/j.jeca.2020.e00192
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    More about this item

    Keywords

    Credit frictions; Fiscal imbalances; Monetary autonomy; Monetary policy rules; Interest rates; DSGE;
    All these keywords.

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General

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