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Analysis of Monetary Policy Responses after Financial Market Crises in a Continuous Time New Keynesian Model

Britta Niehof and Bernd Hayo ()

VfS Annual Conference 2014 (Hamburg): Evidence-based Economic Policy from Verein für Socialpolitik / German Economic Association

Abstract: We develop a dynamic stochastic full equilibrium New Keynesian model of two open economies based on stochastic differential equations to analyse the interdependence between monetary policy and financial markets in the context of the recent financial crisis. The effect of bubbles on stock and housing markets and their transmission to the domestic real economy and the contagious effects on foreign markets are studied. We simulate adjustment paths for the economies under two monetary policy rules: an open-economy Taylor rule and a modified Taylor rule, which takes into account stabilisation of financial markets as a monetary policy objective. We find that for the price of a strong hike in inflation a severe economic recession can be avoided under the modified rule. Using Bayesian estimation techniques, we calibrate the model to the case of the United States and Canada and find that the resulting

JEL-codes: C02 E44 F41 (search for similar items in EconPapers)
Date: 2014
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac, nep-mon and nep-opm
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Working Paper: Analysis of Monetary Policy Responses After Financial Market Crises in a Continuous Time New Keynesian Model (2014) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:vfsc14:100410

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