Taylor Rule and Financial Instability
No 1757, BAFFI CAREFIN Working Papers from BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy
This paper estimates an augmented/non-linear Taylor rule for the ECB and the Riksbank to include financial instability factors. The existence of nonlinearities will be explored and assessed through the estimation of a threshold regression model. The threshold model divides the sample in two distinct subsamples, each representative of a different regime. A composite indicator of systemic stress characterizes the two regimes into a low instability regime and a high instability regime. The results are quite clear. They show us that the classical Taylor rule performs well during Regime 1, or “normal administration times"; but it shows inherently weaknesses in describing the behavior of CBs during financial instability periods, when discretion may be necessary. Remarkably such a non-linear model is also successful in not crossing the ZLB.
New Economics Papers: this item is included in nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations Track citations by RSS feed
Downloads: (external link)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:baf:cbafwp:cbafwp1757
Access Statistics for this paper
More papers in BAFFI CAREFIN Working Papers from BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy Via Röntgen, 1 - 20136 Milano - Italy. Contact information at EDIRC.
Bibliographic data for series maintained by Erika Somma ().