Financial volatility and optimal instrument choice: A revisit to Poole’s analysis

Meixing Dai ()

MPRA Paper from University Library of Munich, Germany

Abstract: In this paper, using an IS-LM model with reserve market, we examine weather the operating procedure actually adopted by many central banks in the world, i.e. targeting directly short run interest rates and hence indirectly market interest rates, is more efficient in stabilizing output than a monetary base operating procedure if shocks affecting the interest rate policy are taken into account. Our results suggest that for an interest rate policy to be more efficient than a monetary aggregate oriented policy, central banks should directly target market interest rates which are narrowly linked to the aggregate spending.

Keywords: Poole’s analysis; optimal instrument choice; financial volatility; monetary policy operating procedures. (search for similar items in EconPapers)
JEL-codes: E44 E51 E52 E58 (search for similar items in EconPapers)
Date: 2010-02-18, Revised 2011-02-02
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Published in Economics Bulletin no.1.Vol. 3(2010): pp. 605-613

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Journal Article: Financial volatility and optimal instrument choice: A revisit to Poole's analysis (2010)
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