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Financial cycle and conduct of monetary policy: The amplifier/divider theory

Omar Chafik ()

MPRA Paper from University Library of Munich, Germany

Abstract: The financial cycle can play a decisive role in the transmission of monetary policy decisions. The impact of these decisions is amplified when the financial cycle is positive, and it is compressed when this cycle is negative. Considering this amplifier/divider mechanism in a semi-structural NKM, estimated for the US economy using Bayesian techniques, confirms this conclusion and improves the decision of raising or lowering the interest rate. The information on the financial cycle also allows a better identification of the inflationary and disinflationary pressures due to the impact of this cycle on the balance between supply and demand of the economy through its action on financing conditions.

Keywords: Financial cycle; monetary policy; New Keynesian Model; output gap; Bayesian estimation. (search for similar items in EconPapers)
JEL-codes: C11 C32 E3 E5 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac and nep-mon
Date: 2018-09-14
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