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Stability and Identification with Optimal Macroprudential Policy Rules

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  • Chatelain, Jean-Bernard
  • Ralf, Kirsten

Abstract

This paper investigates the identification, the determinacy and the stability of ad hoc, "quasi-optimal" and optimal policy rules augmented with financial stability indicators (such as asset prices deviations from their fundamental values) and minimizing the volatility of the policy interest rates, when the central bank precommits to financial stability. Firstly, ad hoc and quasi-optimal rules parameters of financial stability indicators cannot be identified. For those rules, non zero policy rule parameters of financial stability indicators are observationally equivalent to rule parameters set to zero in another rule, so that they are unable to inform monetary policy. Secondly, under controllability conditions, optimal policy rules parameters of financial stability indicators can all be identified, along with a bounded solution stabilizing an unstable economy as in Woodford (2003), with determinacy of the initial conditions of non- predetermined variables.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 55282.

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Date of creation: 12 Apr 2014
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Handle: RePEc:pra:mprapa:55282

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Keywords: Identification; Financial Stability; Optimal Policy under Commitment; Augmented Taylor rule; Monetary Policy.;

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  1. Challe, Edouard & Giannitsarou, Chryssi, 2014. "Stock prices and monetary policy shocks: A general equilibrium approach," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 40(C), pages 46-66.
  2. Beau, D. & Clerc, L. & Mojon, B., 2011. "Macro-prudential policy and the conduct of monetary policy," Occasional papers, Banque de France 8, Banque de France.
  3. John H. Cochrane, 2011. "Determinacy and Identification with Taylor Rules," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 119(3), pages 565 - 615.
  4. Tatiana Kirsanova & Andrew P. Blake, 2010. "Discretionary Policy and Multiple Equilibria in LQ RE Models," 2010 Meeting Papers, Society for Economic Dynamics 789, Society for Economic Dynamics.
  5. Jensen, Henrik, 2009. "Estimated Interest Rate Rules: Do they Determine Determinacy Properties?," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7555, C.E.P.R. Discussion Papers.
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  7. Jagjit S. Chadha & Germana Corrado & Luisa Corrado, 2013. "Stabilisation Policy in a Model of Consumption, Housing Collateral and Bank Lending," Studies in Economics, Department of Economics, University of Kent 1316, Department of Economics, University of Kent.
  8. Burmeister, Edwin, 1980. "On Some Conceptual Issues in Rational Expectations Modeling," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 12(4), pages 800-816, November.
  9. Michael Woodford, 2003. "Optimal Interest-Rate Smoothing," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 70(4), pages 861-886, October.
  10. Thomas Christiaans, 2013. "Economic Crises, Housing Price Bubbles And Saddle-Point Economics," Metroeconomica, Wiley Blackwell, Wiley Blackwell, vol. 64(1), pages 197-214, 02.
  11. Xie, Danyang, 1997. "On Time Inconsistency: A Technical Issue in Stackelberg Differential Games," Journal of Economic Theory, Elsevier, Elsevier, vol. 76(2), pages 412-430, October.
  12. Guido Lorenzoni, 2010. "Optimal Monetary Policy with Uncertain Fundamentals and Dispersed Information ," Review of Economic Studies, Oxford University Press, vol. 77(1), pages 305-338.
  13. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, Econometric Society, vol. 48(5), pages 1305-11, July.
  14. Loisel, Olivier, 2009. "Bubble-free policy feedback rules," Journal of Economic Theory, Elsevier, Elsevier, vol. 144(4), pages 1521-1559, July.
  15. Calvo, Guillermo A, 1978. "On the Time Consistency of Optimal Policy in a Monetary Economy," Econometrica, Econometric Society, Econometric Society, vol. 46(6), pages 1411-28, November.
  16. Levine, Paul & Currie, David, 1987. "The design of feedback rules in linear stochastic rational expectations models," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 11(1), pages 1-28, March.
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