Monetary Policy Rules with Financial Instability

Sofia Bauducco, Ales Bulir and Martin Cihak ()

Abstract: To provide a rigorous analysis of monetary policy in the face of financial instability, we extend the standard dynamic stochastic general equilibrium model to include a financial system. Our simulations suggest that if financial instability affects output and inflation with a lag, and if the central bank has privileged information about credit risk, monetary policy responding instantly to increased credit risk can trade off more output and inflation instability today for a faster return to the trend than a policy that follows the simple Taylor rule. This augmented rule leads in some parameterizations to improved outcomes in terms of long-term welfare, however, the welfare impacts of such a rule appear to be negligible.

Keywords: DSGE models; financial instability; monetary policy rule. (search for similar items in EconPapers)
JEL-codes: E52 E58 G21 (search for similar items in EconPapers)
Date: 2008-12
New Economics Papers: this item is included in nep-cba, nep-cmp, nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://www.cnb.cz/export/sites/cnb/en/economic-re ... wp/cnbwp_2008_08.pdf

Related works:
Journal Article: Monetary Policy Rules with Financial Instability (2011)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cnb:wpaper:2008/8

Access Statistics for this paper

More papers in Working Papers from Czech National Bank Contact information at EDIRC.
Bibliographic data for series maintained by Jan Babecky ().