nep-mon New Economics Papers
on Monetary Economics
Issue of 2014‒12‒03
24 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. The Bond Market: An Inflation-Targeter's Best Friend By Andrew K. Rose
  2. ECB monetary policy surprises: identification through cojumps in interest rates By Winkelmann, Lars; Bibinger, Markus; Linzert, Tobias
  3. Monetary Policy with Interest on Reserves By John H. Cochrane
  4. Eurosystem collateral policy and framework: Was it unduly changed? By Guntram B. Wolff
  5. Federal Reserve Policy and Bretton Woods By Michael D. Bordo; Owen F. Humpage
  6. Is the oil currency – oil price nexus affected by dollar swings? By Gabriel Gomes
  7. Electronic currencies for purposive degrowth? By Claudio Vitari
  8. The Price of Stability: The balance sheet policy of the Banque de France and the Gold Standard (1880-1914) By Guillaume Bazot; Michael D. Bordo; Eric Monnet
  9. Frequency Dependence in a Real-Time Monetary Policy Rule By Ashley, Richard; Tsang, Kwok Ping; Verbrugge, Randal
  10. Dynamic Analysis of Exchange Rate Regimes : Policy Implications for Emerging Countries in Asia By Naoyuki Yoshino; Sahoko Kaji; Tamon Asonuma
  11. Inflation Dynamics in Georgia By Kavtaradze, Lasha
  12. Bank Liquidity and Capital Regulation in General Equilibrium By Covas, Francisco; Driscoll, John C.
  13. Constrained Discretion and Central Bank Transparency By Francesco Bianchi; Leonardo Melosi
  14. Opening Remarks By Bullard, James B.
  15. Measuring inflation under rationing: A virtual price approach By Christophe Starzec; François Gardes
  16. Reserve Requirement Policy over the Business Cycle By Pablo Federico; Carlos A. Vegh; Guillermo Vuletin
  17. International Transmission Channels of U.S. Quantitative Easing: Evidence from Canada By Tatjana Dahlhaus; Kristina Hess; Abeer Reza
  18. Economic surprises and inflation expectations: Has anchoring of expectations survived the crisis? By Lejsgaard Autrup, Søren; Grothe, Magdalena
  19. Payment Instruments and Collateral in the Interbank Payment System By Hajime Tomura
  20. The role of jumps in volatility spillovers in foreign exchange markets: meteor shower and heat waves revisited By Lahaye, Jerome; Neely, Christopher J.
  21. Non-Legal-Tender Paper Money: The Structure and Performance of Maryland's Bills of Credit, 1767-1775 By Jim Celia; Farley Grubb
  22. Modelling Inflation Volatility By Eric Eisenstat; Rodney W. Strachan
  23. Are Non-Euro Area EU Countries Importing Low Inflation from the Euro Area? By Plamen Iossifov; Jiri Podpiera
  24. Stability and Identification with Optimal Macroprudential Policy Rules By Jean-Bernard Chatelain; Kirsten Ralf

  1. By: Andrew K. Rose
    Abstract: This paper explores the relationship between inflation and the existence of a publicly-traded, long-maturity, nominal, domestic-currency bond market. Bond holders suffer from inflation and could be a potent anti-inflationary force; I ask whether their presence is apparent empirically. I use a panel data approach, examining the difference in inflation before and after the introduction of a bond market. My primary focus is on countries with inflation targeting regimes, though I also examine countries with hard fixed exchange rates and other monetary regimes. Inflation-targeting countries with a bond market experience inflation approximately three to four percentage points lower than those without a bond market. This effect is economically and statistically significant; it is also insensitive to a variety of estimation strategies, including using political and fiscal instrumental variables. The existence of a bond market has little effect on inflation in other monetary regimes, as do indexed or foreign-denominated bonds.
    JEL: E52 E58
    Date: 2014–09
  2. By: Winkelmann, Lars; Bibinger, Markus; Linzert, Tobias
    Abstract: This paper proposes a new econometric approach to disentangle two distinct response patterns of the yield curve to monetary policy announcements. Based on cojumps in intraday tick-data of a short and long term interest rate, we develop a day-wise test that detects the occurrence of a significant policy surprise and identifies the market perceived source of the surprise. The new test is applied to 133 policy announcements of the European Central Bank (ECB) in the period from 2001-2012. Our main findings indicate a good predictability of ECB policy decisions and remarkably stable perceptions about the ECB’s policy preferences. JEL Classification: E58, C14, C58
    Keywords: central bank communication, non-synchronous and noisy high frequency tick-data, spectral cojump estimator, yield curve
    Date: 2014–05
  3. By: John H. Cochrane
    Abstract: I analyze monetary policy with interest on reserves and a large balance sheet. I show that conventional theories do not determine inflation in this regime, so I base the analysis on the fiscal theory of the price level. I find that monetary policy can peg the nominal rate, and determine expected inflation. With sticky prices, monetary policy can also affect real interest rates and output, though higher interest rates raise output and then inflation. The conventional sign requires a coordinated fiscal-monetary policy contraction. I show how conventional new-Keynesian models also imply strong monetary-fiscal policy coordination to obtain the usual signs. I address theoretical controversies. A concluding section places our current regime in a broader historical context, and opines on how optimal fiscal and monetary policy will evolve in the new regime.
    JEL: E5 E52 E58 E61 E62
    Date: 2014–10
  4. By: Guntram B. Wolff
    Abstract: This Policy Contribution was prepared for the European Parliament Committee on Economic and Monetary Affairs. All Eurosystem credit operations, including the important open market operations, need to be based on adequate collateral. Liquidity is provided to banks against collateral at market prices subject to a haircut. The Eurosystem adapted its collateral framework during the crisis to accept lower-rated assets as collateral. Higher haircuts are applied to insure against liquidity risk as well as the greater volatility of prices of lower-rated assets. The adaptation of the collateral framework was necessary to provide sufficient liquidity to banks in the euro area periphery in particular. In crisis countries, special emergency liquidity assistance was provided. More than 80 percent of the European Central Bankâ??s liquidity (Main Refinancing Operations and Long Term Refinancing Operations) is provided to banks in five countries (Greece, Ireland, Italy, Portugal and Spain). The changes in the collateral framework were necessary for the ECB to fulfil its treaty-based mandate of providing liquidity to solvent banks and safeguarding financial stability. The ECB did not take on board excessive risks. Alvaro Leandro provided excellent research assistance.
    Date: 2014–11
  5. By: Michael D. Bordo; Owen F. Humpage
    Abstract: During the Bretton Woods era, balance-of-payments developments, gold losses, and exchange-rate concerns had little influence on Federal Reserve monetary policy, even after 1958 when such issues became critical. The Federal Reserve could largely disregard international considerations because the U.S. Treasury instituted a number of stopgap devices—the gold pool, the general agreement to borrow, capital restraints, sterilized foreign-exchange operations—to shore up the dollar and Bretton Woods. These, however, gave Federal Reserve policymakers the latitude to focus on the domestic objectives and shifted responsibility for international developments to the Treasury. Removing the pressure of international considerations from Federal Reserve policy decisions made it easier for the Federal Reserve to pursue the inflationary policies of the late 1960s and 1970s that ultimate destroyed Bretton Woods. In the end, the Treasury’s stopgap devices, which were intended to support Bretton Woods, contributed to its demise.
    JEL: E5 N1
    Date: 2014–11
  6. By: Gabriel Gomes
    Abstract: This paper investigates to which extent dollar real exchange rate movements affect the relationship between oil prices and oil currencies. Estimating a panel cointegrating model between the real exchange rate and its drivers for a sample of 11 OPEC countries and 8 major oil-exporting economies over the 1980-2013 period, we find evidence to support the existence of oil currencies. To analyze how dollar movements may affect the oil price – oil currency nexus, we then estimate a panel smooth transition regression model. Results show that beyond a certain threshold for the dollar depreciation, the sign of the relationship between oil prices and oil countries’ exchange rate switches from positive to negative. In fact, when the dollar depreciation is higher than 2.45%, an increase in oil price has a negative impact on oil exporters’ exchange rate. We also re-explore the causality between the USD real exchange rate and the oil price, showing that the causality between the two variables has changed over the period under study. Finally, we investigate how the Fed monetary policy may impact the oil currency – oil price relationship, and find evidence to support that the US policy rate is a key to understand oil currencies movements.
    Keywords: Oil price; Oil currencies; Non-linearities
    JEL: C33 F31 Q43
    Date: 2014
  7. By: Claudio Vitari (MTS - Management Technologique et Strategique - Grenoble École de Management (GEM))
    Abstract: By one hand, the nature of money influences the objects, the objectives and the methods of production and consumption. On the other hand, the distribution of money influences human behaviors, the supply and the demand of goods, and hence their prices. Today, the banking sector enjoys the privilege of creating around 95% of the money supply. Moreover, as bank money bears interest as a condition of its existence, it has long been argued that a systemic growth imperative is inherent to its design. The pursuit of the interrelated goals of ecological sustainability and social justice calls for changes to money-as-usual. This article focuses on degrowth as a novel paradigm that advances changes in money nature and distribution. We scrutinize electronic currencies, which may be defined as alternatives or complements to legal tender money that circulate in electronic forms. At the hearth of the electronic currencies, Information and Communication Technology has the potential for changing modern society. But does Information and Communication Technology shape our society for purposive degrowth? The article aims to explore to what extent electronic currencies can be considered as practical initiatives for advancing socially equitable and ecologically sustainable degrowth. A literature review is the method employed to bring a first preliminary answer to the research question. Our results show that electronic currencies can contribute at the individual level to support purchases and at the society level to support optimal allocation of resources. Nothing emerged, in literature, supporting the hypothesis that electronic currency could shape our society for purposive degrowth. Extension of the literature review and empirical study of electronic currencies in action will be the next research steps.
    Keywords: Electronic currencies; degrowth; money; work system framework; Information and Communication Technology.
    Date: 2014
  8. By: Guillaume Bazot; Michael D. Bordo; Eric Monnet
    Abstract: Under the classical gold standard (1880-1914), the Bank of France maintained a stable discount rate while the Bank of England changed its rate very frequently. Why did the policies of these central banks, the two pillars of the gold standard, differ so much? How did the Bank of France manage to keep a stable rate and continuously violate the "rules of the game"? This paper tackles these questions and shows that the domestic asset portfolio of the Bank of France played a crucial role in smoothing international shocks and in maintaining the stability of the discount rate. This policy provides a striking example of a central bank that uses its balance sheet to block the interest rate channel and protect the domestic economy from international constraints (Mundell's trilemma).
    JEL: E42 E43 E50 E58 N13 N23
    Date: 2014–10
  9. By: Ashley, Richard (Virginia Tech); Tsang, Kwok Ping (Virginia Tech); Verbrugge, Randal (Federal Reserve Bank of Cleveland)
    Abstract: We estimate a monetary policy rule for the US allowing for possible frequency dependence—i.e., allowing the central bank to respond differently to more persistent innovations than to more transitory innovations, in both the unemployment rate and the inflation rate. Our estimation method uses real-time data in these rates—as did the FOMC—and requires no a priori assumptions on the pattern of frequency dependence or on the nature of the processes generating either the data or the natural rate of unemployment. Unlike other approaches, our estimation method allows for possible feedback in the relationship. Our results convincingly reject linearity in the monetary policy rule, in the sense that we find strong evidence for frequency dependence in the key coefficients of the central bank's policy rule: i.e., the central bank's federal funds rate response to a fluctuation in either the unemployment or the inflation rate depended strongly on the persistence of this fluctuation in the recently observed (real-time) data. These results also provide useful insights into how the central bank's monetary policy rule has varied between the Martin-Burns-Miller and the Volcker-Greenspan time periods.
    Keywords: Taylor rule; frequency dependence; spectral regression; real-time data
    JEL: C22 C32 E52
    Date: 2014–11–19
  10. By: Naoyuki Yoshino (Asian Development Bank Institute (ADBI)); Sahoko Kaji; Tamon Asonuma
    Abstract: This paper discusses desirable exchange rate regimes and how countries can shift from their current regimes to these regimes over the medium term. We demonstrate the superiority of a basket-peg regime with the basket weight rule over a floating regime with the interest rate rule or the money supply rule in small open economies, during periods when volatility of exchange rates is moderate. Countries which currently have fixed exchange rates would be better moving toward either a basket-peg or a floating regime over the medium term. A shift to a basket-peg regime is preferred when exchange rate fluctuations are large.
    Keywords: Southeast Asia, East Asia, exchange rate regime, Emerging Countries, basket-peg regime, floating regime
    JEL: E42 F33 F41 F42
    Date: 2014–10
  11. By: Kavtaradze, Lasha
    Abstract: This paper examines inflation dynamics in Georgia using a hybrid New Keynesian Phillips Curve (NKPC) nested within a time-varying parameter (TVP) framework, which incorporates both forward-looking and backward-looking components. Estimation of a TVP model with stochastic volatility shows low inflation persistence over the entire time span (1996-2012), while revealing increasing volatility of inflation shocks since the “Rose Revolution” in 2003. Moreover, parameter estimates point to the forward-looking component of the model gaining importance following the National Bank of Georgia (NBG) adoption of inflation targeting in 2009. However, since 2011 the inertia of the expected future inflation takes a declining process while the backward-looking (lagged) component gradually climbs upward, thus, challenging the NBG in revising its target benchmark of 6%.
    Keywords: Inflation dynamics, Georgian economy, hybrid NKPC models, time-varying parameters, MCMC sampling method, Kalman filter.
    JEL: E31 E32 E52 E58
    Date: 2014–07–12
  12. By: Covas, Francisco (Board of Governors of the Federal Reserve System (U.S.)); Driscoll, John C. (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: We develop a nonlinear dynamic general equilibrium model with a banking sector and use it to study the macroeconomic impact of introducing a minimum liquidity standard for banks on top of existing capital adequacy requirements. The model generates a distribution of bank sizes arising from differences in banks' ability to generate revenue from loans and from occasionally binding capital and liquidity constraints. Under our baseline calibration, imposing a liquidity requirement would lead to a steady-state decrease of about 3 percent in the amount of loans made, an increase in banks' holdings of securities of at least 6 percent, a fall in the interest rate on securities of a few basis points, and a decline in output of about 0.3 percent. Our results are sensitive to the supply of safe assets: the larger the supply of such securities, the smaller the macroeconomic impact of introducing a minimum liquidity standard for banks, all else being equal. Finally, we show that relaxing the liquidity requirement under a situation of financial stress dampens the response of output to aggregate shocks.
    Keywords: Bank regulation; liquidity requirements; capital requirements; incomplete markets; idiosyncratic risk; macroprudential policy
    JEL: D52 E13 G21 G28
    Date: 2014–09–12
  13. By: Francesco Bianchi; Leonardo Melosi
    Abstract: We develop and estimate a general equilibrium model in which monetary policy can deviate from active inflation stabilization and agents face uncertainty about the nature of these deviations. When observing a deviation, agents conduct Bayesian learning to infer its likely duration. Under constrained discretion, only short deviations occur: Agents are confident about a prompt return to the active regime, macroeconomic uncertainty is low, welfare is high. However, if a deviation persists, agents' beliefs start drifting, uncertainty accelerates, and welfare declines. If the duration of the deviations is announced, uncertainty follows a reverse path. When estimated to match past U.S. experience, our model suggests that transparency lowers uncertainty and increases welfare.
    JEL: C11 D83 E52
    Date: 2014–10
  14. By: Bullard, James B. (Federal Reserve Bank of St. Louis)
    Abstract: October 9, 2014. Opening Remarks. Given at the 39th Annual Federal Reserve Bank of St. Louis Fall Conference, Federal Reserve Bank of St. Louis.
    Date: 2014–10–09
  15. By: Christophe Starzec (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); François Gardes (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    Abstract: The presence of rationing or more generally of the situations of constrained demand can make the traditional methods of measuring inflation questionable and give an erroneous image of the reality. In this paper, we use the virtual price approach (Neary, Roberts, 1980) to estimate the real inflation level in a centrally planned economy (CPE) with administrated prices. In the first part of the paper, we discuss various methods used in CPE's to evaluate the real level of inflation by the market disequilibrium indicators or proxies which take into account rationing and incomplete information. In the second part of the paper, we apply the virtual price approach to compute the real inflationist gap between demand and supply under rationing in Poland's centrally planned economy with administrated prices in 1965-1980 period. We estimate for this period the model of consumer behaviour under rationing and recover the virtual prices reflecting the real cost of purchasing rationed goods following Neary, Roberts' (1980) and Barten's (1994) methodology. The results show a very large difference between official and virtual price of food considered as the most rationed good (up to 500%). The natural experiment of shift from the centrally planned economy to the market economy (or from rationing to market equilibrium) observed in Poland during the "shock therapy" (1990) confirms the scale of estimated by the model gap between the official (administrated) and market prices.
    Keywords: Consumer demand;, rationing; inflation; virtual prices
    Date: 2014–01
  16. By: Pablo Federico; Carlos A. Vegh; Guillermo Vuletin
    Abstract: Based on a novel quarterly dataset for 52 countries for the period 1970-2011, we analyze the use and cyclical properties of reserve requirements (RR) as a macroeconomic stabilization tool and whether RR policy substitutes or complements monetary policy. We find that (i) around two thirds of developing countries have used RR policy as a macroeconomic stabilization tool compared to just one third of industrial countries (and no industrial country since 2004); (ii) most developing countries that rely on RR use them countercyclically; and (iii) in many developing countries, monetary policy is procyclical and hence RR policy has substituted monetary policy as a countercyclical tool. We interpret the latter finding as reflecting the need of many emerging markets to raise interest rates in bad times to defend the currency and not raise or lower the interest rate in good times to prevent further currency appreciation. Under these circumstances, RR policy provides a second instrument that substitutes for monetary policy. Evidence from expanded Taylor rules (i.e., Taylor rules that include a nominal exchange rate target) supports these mechanisms.
    JEL: E52 F41
    Date: 2014–10
  17. By: Tatjana Dahlhaus; Kristina Hess; Abeer Reza
    Abstract: The U.S. Federal Reserve responded to the great recession by reducing policy rates to the effective lower bound. In order to provide further monetary stimulus, they subsequently conducted large-scale asset purchases, quadrupling their balance sheet in the process. We assess the international spillover effects of this quantitative easing program on the Canadian economy in a factor-augmented vector autoregression (FAVAR) framework, by considering a counterfactual scenario in which the Federal Reserve’s long-term asset holdings do not rise in response to the recession. We find that U.S. quantitative easing boosted Canadian output, mainly through the financial channel.
    Keywords: International topics, Monetary policy framework, Transmission of monetary policy
    JEL: C C3 C32 E E5 E52 E58 F F4 F42 F44
    Date: 2014
  18. By: Lejsgaard Autrup, Søren; Grothe, Magdalena
    Abstract: This paper analyses price formation in medium- to longer-term maturity segments of euro area and US inflation-linked and nominal bond markets around the releases of important economic indicators. We compare the pre-crisis and crisis periods, controlling for liquidity effects observed in financial markets. The results allow us to draw conclusions about the anchoring of inflation expectations in the two currency areas before and during the crisis. We find a somewhat stronger anchoring of inflation expectations in the euro area than in the United States. During the crisis, the degree of anchoring of inflation expectations did not change in the euro area, but it decreased to some extent in the United States. JEL Classification: E44, G12, G01
    Keywords: break-even inflation rates, inflation expectations, inflation markets, macroeconomic announcements, nominal and real bond yields
    Date: 2014–04
  19. By: Hajime Tomura (Graduate School of Economics, University of Tokyo)
    Abstract: This paper analyzes the distinction between payment instruments and collateral in the interbank payment system. Given the interbank market is an over-the-counter market, decentralized settlement of bank transfers is inefficient if bank loans are illiquid. In this case, a collat- eralized interbank settlement contract improves efficiency through a liquidity-saving effect. The large value payment system operated by the central bank can be regarded as an implicit implementation of such a contract. This result explains why banks swap Treasury secu- rities for bank reserves despite that both are liquid assets. This paper also discusses if a private clearing house can implement the contract.
    Date: 2014–11
  20. By: Lahaye, Jerome (Fordham University); Neely, Christopher J. (Federal Reserve Bank of St. Louis)
    Abstract: We investigate the role of jumps in transmitting volatility between foreign exchange markets (Engle, Ito, and Lin, 1990; Melvin and Peiers Melvin, 2003; Cai, Howorka, and Wongswan, 2008). We show that recently developed estimators have very different implications for the impact of jumps on exchange rate volatility transmission. Specifically, isolated and successive jumps have opposite predictions for future volatility. Although the realized volatility literature finds that heat wave effects prevail for volatility transmission, we find evidence of both meteor shower and heat wave transmission of integrated volatility; in contrast, that jumps operate mainly in a meteor shower fashion. We also demonstrate the EUR/USD volatility and jump shocks spillover to the USD/JPY but the reverse transmission is much weaker.
    Keywords: realized; volatility; jumps; transmission; periodicity; intraday; meteor shower; heat wave; exchange rate; euro; yen; dollar.
    JEL: C13 C14 C32 C58 F31 F37 G15
    Date: 2014–10–01
  21. By: Jim Celia; Farley Grubb
    Abstract: Maryland's non-legal-tender paper money emissions between 1765 and 1775 are reconstructed to determine the quantities outstanding and their redemption dates, providing a substantial correction to the literature. Over 80 percent of this paper money's current market value was expected real asset present value and under 20 percent was liquidity premium. It was primarily a real barter asset and not a fiat currency. The liquidity premium was positively related to the amount of paper money per capita in circulation. This paper money traded below face value only due to time-discounting and not depreciation. Past scholars have simply confused time-discounting with depreciation.
    JEL: E31 E42 E51 N11 N21 N41
    Date: 2014–09
  22. By: Eric Eisenstat; Rodney W. Strachan
    Abstract: This paper discusses estimation of US inflation volatility using time varying parameter models, in particular whether it should be modelled as a stationary or random walk stochastic process. Specifying inflation volatility as an unbounded process, as implied by the random walk, conflicts with priors beliefs, yet a stationary process cannot capture the low frequency behaviour commonly observed in estimates of volatility. We therefore propose an alternative model with a change-point process in the volatility that allows for switches between stationary models to capture changes in the level and dynamics over the past forty years. To accommodate the stationarity restriction, we develop a new representation that is equivalent to our model but is computationally more efficient. All models produce effectively identical estimates of volatility, but the change-point model provides more information on the level and persistence of volatility and the probabilities of changes. For example, we find a few well defined switches in the volatility process and, interestingly, these switches line up well with economic slowdowns or changes of the Federal Reserve Chair. Moreover, a decomposition of inflation shocks into permanent and transitory components shows that a spike in volatility in the late 2000s was entirely on the transitory side and a characterized by a rise above its long run mean level during a period of higher persistence.
    Keywords: Inflation volatility, monetary policy, time varying parameter model, Bayesian estimation, change-point model.
    JEL: C11 C22 E31
    Date: 2014–11
  23. By: Plamen Iossifov; Jiri Podpiera
    Abstract: The synchronized disinflation across Europe since end-2011 raises the question of whether non-euro area EU countries are affected by the undershooting of the euro area inflation target. To shed light on this issue, we estimate an open-economy, New Keynsian Phillips curve, in which we control for imported inflation. Regression results suggest that falling food and energy prices have been the main disinflationary driver. But low core inflation in the euro area has also had a clear and significant impact. Countries with more rigid exchange-rate regimes and higher share of foreign value added in domestic demand have been more affected. The scope for monetary response to low inflation in non-euro area EU countries depends on concerns about financial stability and unanchoring of inflationary expectations, as well as on exchange rate regime and capital flows dynamics.
    Keywords: Disinflation;Europe;Euro Area;Inflation targeting;Open economies;Econometric models;Inflation, Central and Eastern Europe, Sweden, United Kingdom, Denmark
    Date: 2014–10–22
  24. By: Jean-Bernard Chatelain (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, UP1 - Université Paris 1, Panthéon-Sorbonne - Université Paris I - Panthéon-Sorbonne - PRES HESAM); Kirsten Ralf (Ecole Supérieure du Commerce Extérieur - ESCE - International business school)
    Abstract: This paper investigates the identification, the determinacy and the stability of ad hoc, "quasi-optimal" and optimal policy rules augmented with financial stability indicators (such as asset prices deviations from their fundamental values) and minimizing the volatility of the policy interest rates, when the central bank precommits to financial stability. Firstly, ad hoc and quasi-optimal rules parameters of financial stability indicators cannot be identified. For those rules, non zero policy rule parameters of financial stability indicators are observationally equivalent to rule parameters set to zero in another rule, so that they are unable to inform monetary policy. Secondly, under controllability conditions, optimal policy rules parameters of financial stability indicators can all be identified, along with a bounded solution stabilizing an unstable economy as in Woodford (2003), with determinacy of the initial conditions of non- predetermined variables.
    Keywords: Identification; Financial Stability; Optimal Policy under Commitment; Augmented Taylor rule; Monetary Policy.
    Date: 2014–04–12

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