The Extreme Risk Problem for Monetary Policies of the Euro-Candidates

Hubert Gabrisch and Lucjan Orlowski

No 12/2010, IWH Discussion Papers from Halle Institute for Economic Research (IWH)

Abstract: We argue that monetary policies in euro-candidate countries should also aim at mitigating excessive instability of the key target and instrument variables of monetary policy during turbulent market periods. Our empirical tests show a significant degree of leptokurtosis, thus prevalence of tail-risks, in the conditional volatility series of such variables in the euro-candidate countries. Their central banks will be well-advised to use both standard and unorthodox (discretionary) tools of monetary policy to mitigate such extreme risks while steering their economies out of the crisis and through the euroconvergence process. Such policies provide flexibility that is not embedded in the Taylor-type instrument rules, or in the Maastricht convergence criteria.

Keywords: monetary policy rules; tail-risks; convergence to the euro; global financial crisis; equity market risk; interest rate risk; exchange rate risk; Regeln der Geldpolitik; Tail-Risks; Euro-Konvergenz; weltweite Finanzkrise; Vermögensrisiko; Zinsrisiko; Wechselkursrisiko (search for similar items in EconPapers)
JEL-codes: E44 F31 G15 P34 (search for similar items in EconPapers)
Date: 2010
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:iwhdps:iwh-12-10

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