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(Un)anticipated Monetary Policy in a DSGE Model with a Shadow Banking System

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  • F. Verona

    (Bank of Finland)

  • M. M. F. Martins

    (University of Porto, CEF.UP)

  • I. Drumond

    (DG-ECFIN, European Commission)

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) too low for too long interest rates, (ii) excessive optimism, and (iii) a failure of agents to anticipate the extent of the abnormally favorable conditions.

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Bibliographic Info

Article provided by International Journal of Central Banking in its journal International Journal of Central Banking.

Volume (Year): 9 (2013)
Issue (Month): 3 (September)
Pages: 78-124

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Handle: RePEc:ijc:ijcjou:y:2013:q:3:a:3

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Cited by:
  1. Burgert, Matthias & Schmidt , Sebastian, 2013. "Dealing with a liquidity trap when government debt matters: Optimal time-consistent monetary and fiscal policy," IMFS Working Paper Series 72, Institute for Monetary and Financial Stability (IMFS), Goethe University Frankfurt.
  2. Crowley, Patrick & Garcia, Enrique & Quah , Chee-Heong, 2013. "Is Europe growing together or growing apart?," Research Discussion Papers 33/2013, Bank of Finland.
  3. Cogan, John F. & Taylor, John B. & Wieland, Volker & Wolters, Maik Hendrik, 2013. "Fiscal consolidation strategy: An update for the budget reform proposal of march 2013," IMFS Working Paper Series 68, Institute for Monetary and Financial Stability (IMFS), Goethe University Frankfurt.

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