Monetary Policy Games, Instability and Incomplete Information

Richard Barrett, Ioanna Kokores and Somnath Sen

Discussion Papers from Department of Economics, University of Birmingham

Abstract: Central banks, in executing monetary policy, while pursuing traditional objectives, such as the control of inflation, may try also to promote financial stability. In this paper, we explore a simple monetary policy game played between the central bank and the financial sector. The central bank can be of two types, one traditional and the other concerned with controlling the financial markets; however, the financial sector is unsure which, due to incomplete information. The conclusion of the paper is that for small shocks to inflation there is a pooling equilibrium, whereas for larger shocks there is separation. In the latter case, central bank concern for the stability of the financial sector is outed. We conclude by relating our results to the recent worldwide financial crisis.

Keywords: Monetary policy; central bank; financial stability; strategic behaviour; incomplete information (search for similar items in EconPapers)
JEL-codes: E44 E52 E58 E61 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2011-04
New Economics Papers: this item is included in nep-cba, nep-gth and nep-mon
References: View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:bir:birmec:11-10

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