Four Monetary Policy Strategies in Comparison: How to Deal with Financial Instability?
AbstractThe article provides a review of the monetary policy strategies of four major central banks – the Eurosystem, the Federal Reserve, the Bank of Japan and the Bank of England – and investigates whether these strategies are modified in times of financial instability. The study finds a number of – statutory and actual – differences regarding the central banks’ objective(s), strategies and approaches to achieve the objective(s), and communication, including the publication of forecasts. While central bank laws are often not very explicit about financial stability, there is consensus that the latter is a major concern in practice. Many see the 2007/2008 financial crisis as yet another reminder that central banks in their monetary policy strategies need to take a longer-term and broader view than might have been suggested only a few years ago. All four central banks’ monetary policy strategies in principle allow for adequate incorporation of financial stability concerns. The lender of last resort function poses challenges for the operational implementation of monetary policy and their credibility as competent and reliable policy institutions. While central banks have been praised for their flexibility in dealing with the recent crisis, this very flexibility may also create moral hazard for the future. Empirical estimates of Taylor-type reaction functions, augmented for a measure of financial instability, confirm some relevant differences in the reaction elasticities to inflation and the output gap, as well as significant effects of financial instability on the interest rate setting behavior of the Bank of England, which are in line with the theoretical view that less inertia in monetary policy should be allowed for in times of financial market risks.
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Bibliographic InfoArticle provided by Oesterreichische Nationalbank (Austrian Central Bank) in its journal Monetary Policy & the Economy.
Volume (Year): (2008)
Issue (Month): 3 ()
Postal: Oesterreichische Nationalbank, Documentation Management and Communications Services, Otto-Wagner Platz 3, A-1090 Vienna, Austria
Find related papers by JEL classification:
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
- E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
- G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
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- Ansgar Belke & Jens Klose, 2010.
"(How) Do the ECB and the Fed React to Financial Market Uncertainty?: The Taylor Rule in Times of Crisis,"
Discussion Papers of DIW Berlin
972, DIW Berlin, German Institute for Economic Research.
- Ansgar Belke & Jens Klose, 2010. "(How) Do the ECB and the Fed React to Financial Market Uncertainty? – The Taylor Rule in Times of Crisis," Ruhr Economic Papers 0166, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
- Belke, Ansgar & Klose, Jens, 2013. "Modifying Taylor reaction functions in the presence of the zero‐lower‐bound — Evidence for the ECB and the Fed," Economic Modelling, Elsevier, vol. 35(C), pages 515-527.
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