Incorporation financial sector risk into monetary policy models: application to Chile
Dale F. Gray,
Carlos García,
Leonardo Luna and
Jorge Restrepo ()
Additional contact information
Dale F. Gray: International Monetary Fund, Washington D.C.-USA
Leonardo Luna: Transelec, Chile
Jorge Restrepo: Banco Central de Chile, http://www.bcentral.cl
ILADES-UAH Working Papers from Universidad Alberto Hurtado/School of Economics and Business
Abstract:
This article analyzes whether market-based financial stability indicators (FSIs) should be included in monetary policy models and, if so, how.1 Since the economy and interest rates affect financial sector credit risk, and the financial sector affects the economy, this article builds a model of financial sector vulnerability and integrates it into a macroeconomic framework, typically used for monetary policy analysis. More specifically, should the central bank explicitly include the financial stability indicator in its monetary policy (interest rate) reaction function? This is the most important question to be answered in this article. The alternative would be to react only indirectly to financial risk by reacting to inflation and gross domestic product (GDP) gaps, since they already include the effect that financial factors have on the economy.
Keywords: financial sector risk; monetary policy models (search for similar items in EconPapers)
JEL-codes: E32 E61 E62 E63 F41 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2009-12
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)
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Related works:
Chapter: Incorporating Financial Sector Risk Into Monetary Policy Models: Application to Chile (2011) 
Working Paper: Incorporating Financial Sector Risk Into Monetary Policy Models: Application to Chile (2011) 
Journal Article: Incorporating Financial Sector Risk Into Monetary Policy Models: Application to Chile (2009) 
Working Paper: Incorporating Financial Sector Risk into Monetary Policy Models: Application to Chile (2009) 
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