Flexible inflation targeting and financial stability: Is it enough to stabilise inflation and output?

Qaisar Akram and Øyvind Eitrheim

No 2006/07, Working Paper from Norges Bank

Abstract: We investigate empirically whether a central bank can promote financial stability by stabilising inflation and output, and whether additional stabilisation of asset prices and credit growth would enhance financial stability, in particular. We employ an econometric model of the Norwegian economy to investigate the performance of simple interest rate rules that allow a response to asset prices and credit growth, in addition to inflation and output. We find that output stability also promotes financial stability, while inflation stability is achieved at the expense of both output and financial stability. A stabilisation of house prices, equity prices and/or credit growth enhances stability in both inflation and output, but not financial stability. By contrast, stabilisation of the nominal exchange rate induces excess volatility in general.

Keywords: Monetary policy; financial stability; asset prices; interest rate rules. (search for similar items in EconPapers)
JEL-codes: C51 C52 C53 E47 E52 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2006-08-31
New Economics Papers: this item is included in nep-cba, nep-fmk, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Journal Article: Flexible inflation targeting and financial stability: Is it enough to stabilize inflation and output? (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:bno:worpap:2006_07

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