Incorporating Financial Stability in Inflation Targeting Frameworks
AbstractThe global financial crisis has exposed the limitations of a conventional inflation targeting (IT) framework in insulating an economy from shocks, and demonstrated that its rigid application may aggravate the effect of shocks on output and inflation. Accordingly, we investigate possible refinements to the IT framework by incorporating financial stability considerations. We propose a small open economy DSGE model, calibrated for Korea during the period of 2003 - 07, with real and financial frictions. The findings indicate that incorporating financial stability considerations can help smooth business cycle fluctuations more effectively than a conventional IT framework.
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Bibliographic InfoPaper provided by International Monetary Fund in its series IMF Working Papers with number 11/224.
Date of creation: 01 Sep 2011
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This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-10-15 (All new papers)
- NEP-CBA-2011-10-15 (Central Banking)
- NEP-DGE-2011-10-15 (Dynamic General Equilibrium)
- NEP-MAC-2011-10-15 (Macroeconomics)
- NEP-MON-2011-10-15 (Monetary Economics)
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