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Taylor Rule Under Financial Instability

This paper contributes to the analysis of monetary policy in the face of financial instability. In particular, we extend the standard new Keynesian dynamic stochastic general equilibrium (DSGE) model with sticky prices to include a financial system. Our simulations suggest that if financial instabil...

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Bibliographic Details
Main Author: Cihak, Martin
Other Authors: Bulir, Ales, Bauducco, Sofía
Format: eBook
Language:English
Published: Washington, D.C. International Monetary Fund 2008
Series:IMF Working Papers
Subjects:
Depository Institutions
Interest Rates
Research And Development
Banks
Finance
Intellectual Property Rights: General
Banks And Banking
Technology
Industries: Financial Services
Micro Finance Institutions
Technology; General Issues
Mortgages
Loans
Financial Institutions And Services: General
Innovation
Financial Services Industry
Banking
Technological Change
Interest Rates: Determination, Term Structure, And Effects
Financial Sector
Central Bank Policy Rate
United States
Online Access:
Collection: International Monetary Fund - Collection details see MPG.ReNa
Description
Summary:This paper contributes to the analysis of monetary policy in the face of financial instability. In particular, we extend the standard new Keynesian dynamic stochastic general equilibrium (DSGE) model with sticky prices to include a financial system. Our simulations suggest that if financial instability affects output and inflation with a lag and if the central bank has privileged information about credit risk, monetary policy that responds instantly to increased credit risk can trade off more output and inflation instability today for a faster return to the trend than a policy that follows the simple Taylor rule with only the contemporaneous output gap and inflation
Physical Description:41 pages
ISBN:9781451868807

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