Scandinavian Working Papers in Economics
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Bank of Finland Research Discussion Papers, Bank of Finland

No 4/2013:
(Un)anticipated monetary policy in a DSGE model with a shadow banking system

Fabio Verona (), Manuel M. F. Martins () and Inęs Drumond ()

Abstract: Motivated by the U.S. events of the 2000s, we address whether a too low for too long interest rate policy may generate a boom-bust cycle. We simulate anticipated and unanticipated monetary policies in state-of-the-art DSGE models and in a model with bond financing via a shadow banking system, in which the bond spread is calibrated for normal and optimistic times. Our results suggest that the U.S. boom-bust was caused by the combination of (i) interest rates that were too low for too long, (ii) excessive optimism and (iii) a failure of agents to anticipate the extent of the abnormally favourable conditions.

Keywords: DSGE model; shadow banking system; too low for too long; boom-bust; (follow links to similar papers)

JEL-Codes: E32; E44; E52; G24; (follow links to similar papers)

40 pages, April 11, 2013

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This paper is published as:
Verona, Fabio, Manuel M. F. Martins and Inęs Drumond, (2013), '(Un)anticipated monetary policy in a DSGE model with a shadow banking system', International Journal of Central Banking, Vol. 9, September, No. 3, pages 73-117

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