Welfare Analysis of Policy Measures for Financial Stability

March 1, 2013
Ko Munakata^*1
Koji Nakamura^*2
Yuki Teranishi^*3

Abstract

We introduce the financial market friction through the search and matching in the loan market into a dynamic stochastic general equilibrium (DSGE) model. We reveal that the second order approximation of social welfare includes the terms relating credit, such as credit market tightness, the volume of credit, and a loan separation rate, in addition to the inflation rate and the output gap under the financial market friction. Our analytical result justifies the reason why the optimal policy should take the credit variation into account. We introduce a monetary policy and other policy measures for the financial stability into the model. The optimal outcome is achieved through the monetary and other policy measures by taking into account not only price stability but also financial stability.

We thank Kosuke Aoki for valuable suggestions and comments. Views expressed in this paper are those of the authors and do not necessarily reflect the official views of the Bank of Japan.

*1 Oita Branch
E-mail : kou.munakata@boj.or.jp
*2 Financial System and Bank Examination Department
E-mail : kouji.nakamura@boj.or.jp
*3 Financial System and Bank Examination Department
E-mail : yuuki.teranishi@boj.or.jp

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