Loan production and monetary policy

The authors examine optimal monetary policy in a New Keynesian model with unemployment and financial frictions where banks produce loans using equity as collateral. Firms and households demand loans to finance externally a fraction of their flows of expenditures. Our findings show amplifying business-cycle effects of a more rigid loan production technology. In the monetary policy analysis, the optimal rule clearly outperforms a Taylor-type rule. The optimized interest-rate response to the external finance premium turns significantly negative when either banking rigidities are high or when financial shocks are the only source of business cycle fluctuations.The authors are grateful to Banco de Espana for the grant on the project 'Politica monetaria en economias con fricciones financieras y bancarias.' Luca Deidda gratefully acknowledges financial support from the Italian Ministero dell'Universita, PRIN, Fondazione Banco di Sardegna, and Fundaçao para Ciencia ea Tecnologia, Portugal. Miguel Casares and Jose E. Galdon-Sanchez also acknowledge Spanish Ministerio de Economia for research project ECO2015-64330-P