The Extreme Risk Problem for Monetary Policies of the Euro-Candidates
AbstractWe argue that monetary policies in euro-candidate countries should also aim at mitigating excessive instability of the key target and instrument variables of monetary policy during turbulent market periods. Our empirical tests show a significant degree of leptokurtosis, thus prevalence of tail-risks, in the conditional volatility series of such variables in the euro-candidate countries. Their central banks will be well-advised to use both standard and unorthodox (discretionary) tools of monetary policy to mitigate such extreme risks while steering their economies out of the crisis and through the euroconvergence process. Such policies provide flexibility that is not embedded in the Taylor-type instrument rules, or in the Maastricht convergence criteria.
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Bibliographic InfoPaper provided by Halle Institute for Economic Research in its series IWH Discussion Papers with number 12.
Date of creation: May 2010
Date of revision:
monetary policy rules; tail-risks; convergence to the Euro; global financial crisis; equity market risk; interest rate risk; exchange rate risk;
Find related papers by JEL classification:
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- F31 - International Economics - - International Finance - - - Foreign Exchange
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
- P34 - Economic Systems - - Socialist Institutions and Their Transitions - - - Finance
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-06-11 (All new papers)
- NEP-CBA-2010-06-11 (Central Banking)
- NEP-EEC-2010-06-11 (European Economics)
- NEP-MAC-2010-06-11 (Macroeconomics)
- NEP-MON-2010-06-11 (Monetary Economics)
- NEP-TRA-2010-06-11 (Transition Economics)
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- Herbert S. Buscher & Hubert Gabrisch, 2011. "What Might Central Banks Lose or Gain in Case of Euro Adoption – A GARCH-Analysis of Money Market Rates for Sweden, Denmark and the UK," IWH Discussion Papers 9, Halle Institute for Economic Research.
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