Evaluating monetary policy with financial stability objective: rules vs. discretion

Menelik Geremew

Applied Economics Letters, 2017, vol. 24, issue 9, 602-617

Abstract: This article explores whether adding the goal of financial stability to the more traditional goals of output and price stability could improve optimality of monetary policy. A Dynamic Stochastic General Equilibrium model that endogenously incorporates financial frictions is used to derive optimality conditions across rule-based and discretionary monetary policy environments. The results indicate that it is optimal for the Central Bank to keep output below the potential level in the short term so as to dampen the inflationary effects arising from supply and financial shocks. When the economy is exposed to a financial shock, both leverage and credit spread rise significantly, thereby tipping the economy into a financial crisis and raising the probability of macroeconomic risk.

Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://hdl.handle.net/10.1080/13504851.2016.1217299 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:apeclt:v:24:y:2017:i:9:p:602-617

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/RAEL20

DOI: 10.1080/13504851.2016.1217299

Access Statistics for this article

Applied Economics Letters is currently edited by Anita Phillips

More articles in Applied Economics Letters from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().