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Monetary policy flexibility, risk management, and financial disruptions

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  • Mishkin, Frederic S.

Abstract

This paper argues that the monetary policy that is appropriate during an episode of financial market disruption is likely to be quite different than in times of normal market functioning. When financial markets experience a significant disruption, a systematic approach to risk management requires policymakers to be preemptive in responding to the macroeconomic implications of incoming financial market information, and decisive actions may be required to reduce the likelihood of an adverse feedback loop. The central bank also needs to exhibit flexibility--that is, less inertia and gradualism than would otherwise be typical--not only in moving decisively to reduce downside risks arising from a financial market disruption, but also in being prepared to take back some of that insurance in response to a recovery in financial markets or an upward shift in inflation risks.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Asian Economics.

Volume (Year): 21 (2010)
Issue (Month): 3 (June)
Pages: 242-246

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Handle: RePEc:eee:asieco:v:21:y:2010:i:3:p:242-246

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Web page: http://www.elsevier.com/locate/asieco

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Keywords: Monetary policy Risk management Financial crisis Gradualism Adverse feedback loop;

References

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Citations

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Cited by:
  1. Gozgor, Giray, 2014. "Determinants of domestic credit levels in emerging markets: The role of external factors," Emerging Markets Review, Elsevier, vol. 18(C), pages 1-18.
  2. Blau, Benjamin M. & Brough, Tyler J. & Thomas, Diana W., 2013. "Corporate lobbying, political connections, and the bailout of banks," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 3007-3017.
  3. Roman Horvath & Jaromir Baxa & Borek Vasicek, 2011. "How Does Monetary Policy Respond to Financial Stress?," EcoMod2011 2769, EcoMod.
  4. Zhang, Zhiwei & Zhang, Wenlang, 2011. "The road to recovery: Fiscal stimulus, financial sector rehabilitation, and potential risks ahead," Journal of Asian Economics, Elsevier, vol. 22(4), pages 311-321, August.

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