The Optimal Monetary Instrument for Prudential Purposes

Charles Goodhart (), Dimitrios Panayotis Tsomocos and Pojanart Sunirand

FMG Discussion Papers from Financial Markets Group

Abstract: The purpose of this paper is to assess the choice between adopting a monetary base or an interest rate setting instrument to maintain financial stability. Our results suggest that the interest rate instrument is preferable, since during times of a panic or financial crisis the Central Bank automatically satisfies the increased demand for money. Thus, it prevents sharp losses in asset values and enhanced asset volatility.

New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-pke
Date: 2008-08

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Working Paper: The Optimal Monetary Instrument for Prudential Purposes (2008)
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