Abstract
This article examines the role of financial frictions on real economic fluctuation and monetary policy transmission. We use a Dynamic Stochastic General Equilibrium (DSGE) model with financial friction and price rigidities. In this model, frictions appear, between the bank and the entrepreneur through the financial accelerator, and between the bank and its creditors through the capital channel. We seek to understand how the monetary authorities limited the effects of financial instability by using the interest rate as the main instrument. The results indicate that the financial shock has an enhancing effect on the financial and macroeconomic variables, especially after the revolution of 2011. Besides, we find that if the central bank of Tunisia introduces the financial stability objective on its reaction function it cannot simultaneously stabilize inflation and credit.
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Notes
- 1.
Relating to a supposed cycle in which periods of prosperity and development alternate with periods of decline.
- 2.
This technique makes it possible to fix the values of the structural parameters from the literature of the countries. It aims at interpreting the variation of the variables concerning their steady state.
- 3.
In this series, the value of banking capital is considered as an indicator that measures the financial health of Tunisian banks.
- 4.
The model assumes that the bank that declares failure it exits the market and transforms part of its funds, \(t^b\) to the new or existing bank on the market.
- 5.
Bailliu et al. (2015) assume that, in equilibrium, the anticipated rate of capital's return, \({\text{E}}_t {\text{R}}_{t + 1}^K\)\({\text{E}}_t {\text{R}}_t^{k + 1}\) is equivalent to the anticipated cost of external funds.
- 6.
In accordance to Badarau and Popescu (2014), \(\overline{r^K }\) = 1/\(\beta\).
- 7.
As Bernanke et al. (1999), we suppose that the wage of entrepreneurial labor is equal to unity, and then its variation does not have a significant impact on the result.
- 8.
The results are not shown in this table, but the consumption correlates negatively with the interest rate.
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Salem, S.B., Salem, H.H., Mansour, N., Labidi, M. (2022). The Financial Friction and Optimal Monetary Policy: The Role of Interest Rate. In: Echchabi, A., Grassa, R., Sibanda, W. (eds) Contemporary Research in Accounting and Finance. Palgrave Macmillan, Singapore. https://doi.org/10.1007/978-981-16-8267-4_6
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