Financial Stability and Optimal Interest Rate Policy

Andrea Ajello, Thomas Laubach, David López-Salido and Taisuke Nakata
Additional contact information
Andrea Ajello: Federal Reserve Board
David López-Salido: Federal Reserve Board
Taisuke Nakata: Federal Reserve Board

International Journal of Central Banking, 2019, vol. 15, issue 1, 279-326

Abstract: We study optimal interest rate policy in a New Keynesian framework in which the model economy can experience financial crises and the probability of a crisis depends on credit conditions. We find that the optimal response of the shortterm interest rate to credit conditions is (very) small in the model calibrated to match the historical relationship between credit conditions, output, inflation, and likelihood of financial crises. Given the imprecise estimates of key parameters, we also study optimal policy under parameter uncertainty. We find that Bayesian and robust central banks will respond more aggressively to financial instability when the probability and severity of financial crises are uncertain.

JEL-codes: E43 E52 E58 G01 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (35)

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Related works:
Working Paper: Financial Stability and Optimal Interest-Rate Policy (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:ijc:ijcjou:y:2019:q:1:a:7

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