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A New Two-Pillar Strategy for the ECB

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  • Paul De Grauwe
  • Daniel Gros

Abstract

The ECB has been arguing in the past that since there is no trade-off between price stability and financial stability, the pursuit of price stability is the best a central bank can do to also maintain financial stability. We argue that there is a potential trade-off between price stability and financial stability. In order to make this trade-off less constraining we propose that the two-pillar strategy of the ECB should be reformed. In this new two-pillar strategy, the ECB should pursue two objectives, i.e. price stability and financial stability. In this new strategy the interest rate should be used to achieve the inflation objective, while other instruments (minimum reserve requirements and macro prudential control) should be used to achieve financial stability.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2009/wp-cesifo-2009-10/cesifo1_wp2818.pdf
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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2818.

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Date of creation: 2009
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Handle: RePEc:ces:ceswps:_2818

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Related research

Keywords: inflation targeting; financial stability; two pillar strategy;

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References

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  1. Alessi, Lucia & Detken, Carsten, 2009. "'Real time'early warning indicators for costly asset price boom/bust cycles: a role for global liquidity," Working Paper Series 1039, European Central Bank.
  2. Ben Bernanke & Mark Gertler, 1999. "Monetary policy and asset price volatility," Economic Review, Federal Reserve Bank of Kansas City, issue Q IV, pages 17-51.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. A new 2 pillar strategy for ECB
    by Amol Agrawal in Mostly Economics on 2010-01-12 12:07:49
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Cited by:
  1. Meixing Dai, 2010. "Financial volatility and optimal instrument choice: A revisit to Poole's analysis," Economics Bulletin, AccessEcon, vol. 30(1), pages 605-613.
  2. Florina-Cristina Badarau & Alexandra Popescu, 2012. "Monetary Policy and Credit Cycles: A DSGE Analysis," Working Papers halshs-00828074, HAL.
  3. Lannoo, Karel, 2011. "EU Federalism in Crisis," CEPS Papers 6498, Centre for European Policy Studies.
  4. Schwäbe, Carsten, 2013. "Unkonventionelle Geldpolitik: Warum die Europäische Zentralbank ihre Unabhängigkeit nicht verloren hat," CIW Discussion Papers 3/2013, University of Münster, Center for Interdisciplinary Economics (CIW).
  5. Tiziana Assenza & Michele Berardi & Domenico Delli Gatti, 2011. "Was Bernanke Right? Targeting Asset Prices may not be a Good Idea after all," CESifo Working Paper Series 3641, CESifo Group Munich.
  6. Tristan Nguyen, 2011. "A macro-prudential perspective of financial regulation," Journal of Financial Regulation and Compliance, Emerald Group Publishing, vol. 19(3), pages 289-297, July.
  7. repec:ebl:ecbull:v:30:y:2010:i:1:p:605-613 is not listed on IDEAS

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