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Analysis of Monetary Policy and Financial Stability: A New Paradigm

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  • Charles A. E. Goodhart
  • Carolina Osorio
  • Dimitrios P. Tsomocos

Abstract

This paper introduces agent heterogeneity, liquidity, and endogenous default to a DSGE framework. Our model allows for a comprehensive assessment of regulatory and monetary policy, as well as welfare analysis in the different sectors of the economy. Due to liquidity and endogenous default, the transmission mechanism of shocks is well defined, and their short to medium run effects on financial stability are properly captured.

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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-2009-12/cesifo1_wp2885.pdf
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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2885.

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Date of creation: 2009
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Handle: RePEc:ces:ceswps:_2885

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Related research

Keywords: general equilibrium; financial fragility; monetary policy; regulation;

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References

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  1. Leao, Emanuel R. & Leao, Pedro R., 2007. "Modelling the central bank repo rate in a dynamic general equilibrium framework," Economic Modelling, Elsevier, Elsevier, vol. 24(4), pages 571-610, July.
  2. Willem H. Buiter, 1999. "The Fallacy of the Fiscal Theory of the Price Level," NBER Working Papers 7302, National Bureau of Economic Research, Inc.
  3. Dimitrios P Tsomocos, 2006. "Generic Determinacy and Money Non-Neutrality of International Monetary Equilibria," Economics Series Working Papers 2006-FE-07, University of Oxford, Department of Economics.
  4. C.A.E. Goodhart & P. Sunirand & D.P. Tsomocos, 2008. "The Optimal Monetary Instrument for Prudential Purposes," OFRC Working Papers Series, Oxford Financial Research Centre 2008fe26, Oxford Financial Research Centre.
  5. Frank Schorfheide, 2000. "Loss function-based evaluation of DSGE models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 15(6), pages 645-670.
  6. Matteo Iacoviello & Stefano Neri, 2008. "Housing market spillovers: Evidence from an estimated DSGE model," Temi di discussione (Economic working papers), Bank of Italy, Economic Research and International Relations Area 659, Bank of Italy, Economic Research and International Relations Area.
  7. C.A.E. Goodhard & P. Sunirand, 2008. "The Optimal Monetary Instrument for Prudential Purposes," Economics Series Working Papers 2008fe26, University of Oxford, Department of Economics.
  8. Dimitrios P Tsomocos & Charles A.E. Goodhart, 2003. "A Model to Analyse Financial Fragility," Economics Series Working Papers 2003-FE-13, University of Oxford, Department of Economics.
  9. Vasco Cúrdia & Michael Woodford, 2009. "Credit Spreads and Monetary Policy," Discussion Papers, Columbia University, Department of Economics 0910-01, Columbia University, Department of Economics.
  10. Tsomocos, Dimitrios P., 2003. "Equilibrium analysis, banking and financial instability," Journal of Mathematical Economics, Elsevier, vol. 39(5-6), pages 619-655, July.
  11. Bernanke, B. & Gertler, M. & Gilchrist, S., 1998. "The Financial Accelerator in a Quantitative Business Cycle Framework," Working Papers, C.V. Starr Center for Applied Economics, New York University 98-03, C.V. Starr Center for Applied Economics, New York University.
  12. Dimitrios P Tsomocos & Charles A.E. Goodhart, 2004. "A Model to Analyse Financial Fragility: Applications," Economics Series Working Papers 2004-FE-05, University of Oxford, Department of Economics.
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Citations

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Cited by:
  1. ATI Abdessatar & BEN JAZIA Rachida, 2013. "Institutional Quality And Financial Stress: Experience From Emerging Country," Studies in Business and Economics, Lucian Blaga University of Sibiu, Faculty of Economic Sciences, Lucian Blaga University of Sibiu, Faculty of Economic Sciences, vol. 8(3), pages 5-20, December.
  2. Eduardo Strachman & José Ricardo Fucidji, 2012. "The Current Financial And Economic Crisis: Empirical And Methodological Issues," Journal of Advanced Studies in Finance, ASERS Publishing, vol. 0(1), pages 95-123, June.
  3. Jaromír Baxa & Roman Horváth & Borek Vasícek, 2011. "Monetary Policy Rules and Financial Stress: Does Financial Instability Matter for Monetary," Working Papers wpdea1101, Department of Applied Economics at Universitat Autonoma of Barcelona.
  4. Albulescu, Claudiu Tiberiu, 2013. "Financial Stability and Monetary Policy: A Reduced-Form Model for the EURO Area," Journal for Economic Forecasting, Institute for Economic Forecasting, Institute for Economic Forecasting, vol. 0(1), pages 62-81, March.
  5. Ivashchenko, S., 2013. "Dynamic Stochastic General Equilibrium Model with Banks and Endogenous Defaults of Firms," Journal of the New Economic Association, New Economic Association, New Economic Association, vol. 19(3), pages 27-50.
  6. Itai Agur & Maria Demertzis, 2011. ""Leaning Against the Wind" and the Timing of Monetary Pollicy," DNB Working Papers, Netherlands Central Bank, Research Department 303, Netherlands Central Bank, Research Department.
  7. Roman Horvath & Jaromir Baxa & Borek Vasicek, 2011. "How Does Monetary Policy Respond to Financial Stress?," EcoMod2011 2769, EcoMod.
  8. Eva Zamrazilová, 2011. "Monetary Policy: Old Lessons and New Challenges," Politická ekonomie, University of Economics, Prague, University of Economics, Prague, vol. 2011(1), pages 3-21.
  9. Abdelaziz Rouabah & John Theal, 2010. "Stress testing: The impact of shocks on the capital needs of the Luxembourg banking sector," BCL working papers, Central Bank of Luxembourg 47, Central Bank of Luxembourg.
  10. Dalla Pellegrina, L. & Masciandaro, D. & Pansini, R.V., 2013. "The central banker as prudential supervisor: Does independence matter?," Journal of Financial Stability, Elsevier, Elsevier, vol. 9(3), pages 415-427.

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