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The Optimal Monetary Instrument for Prudential Purposes

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  • Charles Goodhart

    ()

  • Dimitrios Tsomocos

    ()

  • Pojanart Sunirand

Abstract

The purpose of this paper is to assess the choice between adopting a monetary base or an interest rate setting instrument to maintain financial stability. Our results suggest that the interest rate instrument is preferable, since during times of a panic or financial crisis the Central Bank automatically satisfies the increased demand for money. Thus, it prevents sharp losses in asset values and enhanced asset volatility.

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File URL: http://www.lse.ac.uk/fmg/workingPapers/discussionPapers/fmgdps/dp617.pdf
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Bibliographic Info

Paper provided by Financial Markets Group in its series FMG Discussion Papers with number dp617.

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Date of creation: Aug 2008
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Handle: RePEc:fmg:fmgdps:dp617

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Web page: http://www.lse.ac.uk/fmg/

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  1. M. Shubik & D. Tsomocos, 1992. "A strategic market game with a mutual bank with fractional reserves and redemption in gold," Journal of Economics, Springer, vol. 55(2), pages 123-150, June.
  2. Dimitrios P Tsomocos & Sudipto Bhattacharya, 2006. "Banks, Relative Performance, and Sequential Contagion," Economics Series Working Papers 2006-FE-10, University of Oxford, Department of Economics.
  3. Miron, Jeffrey A, 1986. "Financial Panics, the Seasonality of the Nominal Interest Rate, and theFounding of the Fed," American Economic Review, American Economic Association, vol. 76(1), pages 125-40, March.
  4. Charles A.E. Goodhart & Pojanart Sunirand & Dimitrios P. Tsomocos, 2004. "A Model to Analyse Financial Fragility: Applications," OFRC Working Papers Series 2004fe05, Oxford Financial Research Centre.
  5. O. Aspachs & C. Goodhart & M. Segoviano & D. Tsomocos & L. Zicchino, 2006. "Searching for a Metric for Financial Stability," OFRC Working Papers Series 2006fe09, Oxford Financial Research Centre.
  6. Charles Goodhart & Pojanart Sunirand & Dimitrios P. Tsomocos, 2004. "A model to analyse financial fragility," LSE Research Online Documents on Economics 24703, London School of Economics and Political Science, LSE Library.
  7. Jeffrey A. Miron, 1990. "The Economics of Seasonal Cycles," NBER Working Papers 3522, National Bureau of Economic Research, Inc.
  8. Dimitrios P Tsomocos, 2000. "Equilibrium Analysis, Banking and Financial Instability," Economics Series Working Papers 2003-FE-08, University of Oxford, Department of Economics.
  9. Dimitrios P Tsomocos, 2006. "Towards a Measure of Financial Fragility," Economics Series Working Papers 2006-FE-04, University of Oxford, Department of Economics.
  10. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
  11. Charles A.E. Goodhart & Pojanart Sunirand & Dimitrios P. Tsomocos, 2004. "A Risk Assessment Model for Banks," OFRC Working Papers Series 2004fe11, Oxford Financial Research Centre.
  12. Charles A.E. Goodhart & Pojanart Sunirand & Dimitrios P. Tsomocos, 2004. "A Time Series Analysis of Financial Fragility in the UK Banking System," OFRC Working Papers Series 2004fe18, Oxford Financial Research Centre.
  13. William Poole, 1970. "Optimal choice of monetary policy instruments in a simple stochastic macro model," Staff Studies 57, Board of Governors of the Federal Reserve System (U.S.).
  14. Bennett T. McCallum, 1999. "Recent developments in the analysis of monetary policy rules," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 3-12.
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Cited by:
  1. Stan du Plessis, 2012. "Assets matter: New and old views of monetary policy," Working Papers 16/2012, Stellenbosch University, Department of Economics.
  2. Vasile Cocris & Anca Elena Nucu, 2013. "Monetary policy and financial stability: empirical evidence from Central and Eastern European countries," Baltic Journal of Economics, Baltic International Centre for Economic Policy Studies, vol. 13(1), pages 75-98, July.
  3. Kim, Jinyong & Kim, Yong-Cheol, 2013. "Financial crisis and a transmission mechanism of external shocks: The signaling role of the Korean Monetary Stabilization Bond," Journal of Financial Stability, Elsevier, vol. 9(4), pages 682-694.
  4. Maria Th. Kasselaki & Athanasios O. Tagkalakis, 2013. "Financial soundness indicators and financial crisis episodes," Working Papers 158, Bank of Greece.
  5. Meixing Dai, 2010. "Financial volatility and optimal instrument choice: A revisit to Poole's analysis," Economics Bulletin, AccessEcon, vol. 30(1), pages 605-613.
  6. Charles A. E. Goodhart & Carolina Osorio & Dimitrios P. Tsomocos, 2009. "Analysis of Monetary Policy and Financial Stability: A New Paradigm," CESifo Working Paper Series 2885, CESifo Group Munich.
  7. repec:ebl:ecbull:v:30:y:2010:i:1:p:605-613 is not listed on IDEAS

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