Financial frictions and policy cooperation: A case with monopolistic banking and staggered loan contracts

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Abstract

Do financial frictions call for cross-border policy cooperation? This paper investigates the implications of financial frictions in the form of staggered loan contracts supplied by monopolistic banks, for monetary policy. Using the linear quadratic (LQ) framework, we show that policy cooperation yields long-run gains in addition to gains from stabilizing inefficient fluctuations over the business cycle, as usually found in models with price rigidities. The Ramsey optimal steady states differ between cooperation and noncooperation. Such gains from cooperation arise irrespective of capital account liberalization.

Original languageEnglish
Pages (from-to)19-43
Number of pages25
JournalJournal of International Economics
Volume104
DOIs
Publication statusPublished - 2017 Jan 1

Keywords

  • Financial frictions
  • Linear quadratic problem
  • Monetary policy in open economies

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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