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Financial factors and monetary policy: Determinacy and learnability of equilibrium

Paul Kitney

Journal of Economic Dynamics and Control, 2018, vol. 90, issue C, 194-207

Abstract: We contribute to the debate on whether central banks should respond to financial factors in monetary policy rules, by evaluating equilibrium determinacy and E-stability in the presence of a financial accelerator. Policies responding to lagged asset prices either reduce the region of determinacy or E-stability in the parameter space. However, a response to current asset prices expands both regions of determinacy and E-stability. Policy rules reacting to credit volume constrict the determinacy region. Most policies responding to credit spreads expand determinacy and E-stability regions. We favor the inclusion of current asset prices or credit spreads in monetary policy rules.

Keywords: Financial frictions; Learning; Determinacy; Asset prices; Credit spreads; Monetary policy (search for similar items in EconPapers)
JEL-codes: E43 E44 E50 E52 E58 (search for similar items in EconPapers)
Date: 2018
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Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

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