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Monetary Policy Rules with Financial Instability

Sofia Bauducco, Ales Bulir () and Martin Èihák ()
Additional contact information
Martin Èihák: International Monetary Fund, http://www.imf.org/external/index.htm

Authors registered in the RePEc Author Service: Martin Cihak ()

Czech Journal of Economics and Finance (Finance a uver), 2011, vol. 61, issue 6, 545-565

Abstract: To provide a rigorous analysis of monetary policy in the face of financial instability, the authors extend the standard dynamic stochastic general equilibrium model to include a financial system. Their simulations suggest that if financial stability affects output and inflation with a lag, and if the central bank has privileged information about financial stability, then monetary policy responding instantly to deteriorating financial stability can trade off more output and inflation instability today for a faster return to the trend than a policy that follows the traditional Taylor rule. This augmented rule leads in some parameterizations to improved outcomes in terms of long-term welfare, but the welfare impacts of such a rule are small.

Keywords: DSGE models; financial instability; monetary policy rule (search for similar items in EconPapers)
JEL-codes: E52 E58 G21 (search for similar items in EconPapers)
Date: 2011
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Working Paper: Monetary Policy Rules with Financial Instability (2008) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:fau:fauart:v:61:y:2011:i:6:p:545-565

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