Monetary Policy in a Small Economy after Tsunami: A New Consensus on the Horizon?

Jan Frait (), Lubos Komarek () and Zlatuse Komarkova ()

Czech Journal of Economics and Finance (Finance a uver), 2011, vol. 61, issue 1, 5-33

Abstract: The last financial crisis significantly changed views concerning the relationship between monetary policy, asset prices and financial stability. We survey the pre-crisis opinions on the appropriate monetary policy reactions to financial market developments and delineate the new consensus which is currently emerging from the lessons taken. The new consensus is an amended model of flexible inflation targeting in which the central bank “should sometimes lean and can clean”. We try to add the small open economy context to the debate and demonstrate that the optimal reactions of monetary policy-makers in small open economies may differ and that sometimes the optimal solution may not even be available due to the policies of the key world central banks acting as price makers. In such instances, second-best policies have to be considered.

Keywords: monetary policy; financial stability; asset markets; macroprudential policy (search for similar items in EconPapers)
JEL-codes: E52 E58 E61 G12 G18 (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (16)

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Persistent link: https://EconPapers.repec.org/RePEc:fau:fauart:v:61:y:2011:i:1:p:5-33

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