Title: Credit risk and delayed monetary policy effectiveness: A finite horizon multi-phase model
Authors: Willi Semmler - New School for Social Research (United States) [presenting]
Abstract: Given the long period of expansionary monetary policies following the great recession 2008-9, many observers claim that those policies exerted their effects on the real economy through the asset market and repricing of credit risk. To study this channel we add nonlinear dynamics for credit flows and credit spreads in a regime switching inflation targeting model and explore the stabilizing - destabilizing effects of the dynamics of credit flows and risk premia. We study the effectiveness of conventional and unconventional monetary policies on credit flows and credit risk under simultaneous and delayed policy impacts in a multi-phase dynamic model. We use estimated parameters, based on data for the Euro area, and solve a nonlinear controlled dynamic system through AMPL for a finite horizon model. We find that with longer delays policies might not be able to effectively stabilize the macro imbalances in particular if a regime switch has occurred. Though in our context the agents maybe forward looking over a finite horizon, there are also echo effects from the past that come into play with a delay affecting real and financial variables.