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Financial volatility and optimal instrument choice: A revisit to Poole's analysis

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  • Meixing Dai

    ()
    (BETA, University of Strasbourg, France)

Abstract

In this paper, using an IS-LM model with reserve market, we examine weather the operating procedure actually adopted by many central banks in the world, i.e. targeting directly short run interest rates and hence indirectly market interest rates, is more efficient in stabilizing output than a monetary base operating procedure if shocks affecting the interest rate policy are taken into account. Our results suggest that for an interest rate policy to be more efficient than a monetary aggregate oriented policy, central banks should directly target market interest rates which are narrowly linked to the aggregate spending.

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Bibliographic Info

Article provided by AccessEcon in its journal Economics Bulletin.

Volume (Year): 30 (2010)
Issue (Month): 1 ()
Pages: 605-613

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Handle: RePEc:ebl:ecbull:eb-10-00024

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Keywords: Poole's analysis; optimal instrument choice; financial volatility; monetary policy operating procedures.;

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  1. Goodhart, C.A.E. & Sunirand, P. & Tsomocos, D.P., 2011. "The optimal monetary instrument for prudential purposes," Journal of Financial Stability, Elsevier, vol. 7(2), pages 70-77, June.
  2. Michael Woodford, 2007. "How Important is Money in the Conduct of Monetary Policy?," NBER Working Papers 13325, National Bureau of Economic Research, Inc.
  3. Goodfriend, Marvin, 1983. "Discount window borrowing, monetary policy, and the post-October 6, 1979 federal reserve operating procedure," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 343-356, September.
  4. Mathias Hoffmann & Bernd Kempa, 2009. "A Poole Analysis in the New Open Economy Macroeconomic Framework ," Review of International Economics, Wiley Blackwell, vol. 17(5), pages 1074-1097, November.
  5. Carl E. Walsh, 2003. "Monetary Theory and Policy, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232316, December.
  6. William Poole, 1970. "Optimal choice of monetary policy instruments in a simple stochastic macro model," Staff Studies 57, Board of Governors of the Federal Reserve System (U.S.).
  7. Mathias Dewatripont & Lars Peter Hansen & Stephen Turnovsky, 2003. "Advances in economics and econometrics: the eighth world congress," ULB Institutional Repository 2013/9557, ULB -- Universite Libre de Bruxelles.
  8. Paul De Grauwe & Daniel Gros, 2009. "A New Two-Pillar Strategy for the ECB," CESifo Working Paper Series 2818, CESifo Group Munich.
  9. Goodfriend, Marvin, 1991. "Interest rates and the conduct of monetary policy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 34(1), pages 7-30, January.
  10. Waller, Christopher J., 1990. "Administering the window : A game-theoretic model of discount-window borrowing," Journal of Monetary Economics, Elsevier, vol. 25(2), pages 273-287, March.
  11. Ireland, Peter N, 2000. "Interest Rates, Inflation, and Federal Reserve Policy since 1980," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(3), pages 417-34, August.
  12. Modigliani, Franco & Rasche, Robert & Cooper, J Philip, 1970. "Central Bank Policy, the Money Supply, and the Short-Term Rate of Interest," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 2(2), pages 166-218, May.
  13. Carlstrom, Charles T. & Fuerst, Timothy S., 1995. "Interest rate rules vs. money growth rules a welfare comparison in a cash-in-advance economy," Journal of Monetary Economics, Elsevier, vol. 36(2), pages 247-267, November.
  14. VanHoose, David D, 1985. "Bank Market Structure and Monetary Control," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 17(3), pages 298-311, August.
  15. Collard, Fabrice & Dellas, Harris, 2005. "Poole in the New Keynesian model," European Economic Review, Elsevier, vol. 49(4), pages 887-907, May.
  16. McCallum, Bennett T & Hoehn, James G, 1983. "Instrument Choice for Money Stock Control with Contemporaneous and Lagged Reserve Requirements: A Note," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 15(1), pages 96-101, February.
  17. Aftalion, Florin & White, Lawrence J., 1977. "A study of a monetary system with a pegged discount rate under different market structures," Journal of Banking & Finance, Elsevier, vol. 1(4), pages 349-371, December.
  18. Sargent, Thomas J & Wallace, Neil, 1975. ""Rational" Expectations, the Optimal Monetary Instrument, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 83(2), pages 241-54, April.
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