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Abstract
This paper studies the effects of loan supply policy of monetary authority in an economy with price stickiness and labor productivity uncertainty. Procyclical and countercyclical loan policies are defined to supply loans when the productivity is high and low respectively. Compared with the economy of an autonomous loan market, the procyclical loan policy has expansionary (contractionary) effects when the productivity is high (low), whereas the countercyclical loan policy has expansionary (contractionary) effects when the productivity is low (high). Utility-based analysis shows that the procyclical loan policy yields the highest welfare, followed by the autonomous loan market and the countercyclical policy in that order. On the other hand, if there is no productivity uncertainty or if the prices are flexibly determined after the productivity shock, loan policy has no real effect and only the price level changes. |
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Keywords Loan Policy, Price Stickiness, Labor Productivity, Welfare |
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