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(Un)anticipated monetary policy in a DSGE model with a shadow banking system

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Author Info

  • Verona , Fabio

    ()
    (Bank of Finland Research)

  • Martins, Manuel M. F.

    ()
    (University of Porto, Faculty of Economics and CEF:UP)

  • Drumond , Inês

    ()
    (University of Porto, Faculty of Economics and CEF:UP, and 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) interest rates that were too low for too long, (ii) excessive optimism and (iii) a failure of agents to anticipate the extent of the abnormally favourable conditions.

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Bibliographic Info

Paper provided by Bank of Finland in its series Research Discussion Papers with number 4/2013.

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Length: 40 pages
Date of creation: 11 Apr 2013
Date of revision:
Publication status: Published as Verona, Fabio, Manuel M. F. Martins and Inês Drumond, '(Un)anticipated monetary policy in a DSGE model with a shadow banking system' in International Journal of Central Banking, 2013, pages 73-117.
Handle: RePEc:hhs:bofrdp:2013_004

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Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.suomenpankki.fi/en/
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Keywords: DSGE model; shadow banking system; too low for too long; boom-bust;

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Cited by:
  1. Crowley, Patrick & Garcia, Enrique & Quah , Chee-Heong, 2013. "Is Europe growing together or growing apart?," Research Discussion Papers 33/2013, Bank of Finland.

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