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  • TZ - LLP June 2021 JMAC

    Rights statement: This is the author’s version of a work that was accepted for publication in Journal of Macroeconomics. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Journal of Macroeconomics, 69, 2021 DOI: 10.1016/j.jmacro.2021.103338

    Accepted author manuscript, 305 KB, PDF document

    Embargo ends: 18/06/22

    Available under license: CC BY-NC-ND: Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License

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Optimal Loan Loss Provisions and Welfare

Research output: Contribution to journalJournal articlepeer-review

E-pub ahead of print
Article number103338
<mark>Journal publication date</mark>30/09/2021
<mark>Journal</mark>Journal of Macroeconomics
Volume69
Number of pages16
Publication StatusE-pub ahead of print
Early online date18/06/21
<mark>Original language</mark>English

Abstract

We study the welfare implications of optimal loan loss provisions in a New Keynesian model featuring endogenous default risk and inflationary credit spreads. A unique link between provisions, credit spreads and inflation can be employed to enhance macroeconomic stability. Optimal provisions are most effective when dealing with cost-push financial shocks inherent in volatile spreads and the zero bound problem of monetary policy. Relaxing provisioning requirements following a recessionary financial disturbance consistently achieves the first-best outcome while nullifying the value of monetary policy under commitment. In contrast, deflationary demand shocks warrant an optimal rise in provisions, which inflate prices yet mildly contract output.

Bibliographic note

This is the author’s version of a work that was accepted for publication in Journal of Macroeconomics. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Journal of Macroeconomics, 69, 2021 DOI: 10.1016/j.jmacro.2021.103338