Research Discussion Papers, Bank of Finland
No 21/2014:
Financial shocks and optimal monetary policy rules
Fabio Verona ()
, Manuel M. F. Martins ()
and Inęs Drumond ()
Abstract: We assess the performance of optimal Taylor-type interest
rate rules, with and without reaction to financial variables, in
stabilizing the macroeconomy following financial shocks. We use a DSGE
model that comprises both a loan and a bond market, which best suits the
contemporary structure of the U.S. financial system and allows for a wide
set of financial shocks and transmission mechanisms. Overall, we find that
targeting financial stability – in particular credit growth, but in some
cases also financial spreads and asset prices – improves macroeconomic
stabilization. The specific policy implications depend on the policy
regime, and on the origin and the persistence of the financial shock.
Keywords: financial shocks; optimal monetary policy; Taylor rules; DSGE models; bond market; loan market; (follow links to similar papers)
JEL-Codes: E32; E44; E52; (follow links to similar papers)
49 pages, July 25, 2014
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