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The Optimal Monetary Instrument for Prudential Purposes

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  • C.A.E. Goodhart
  • P. Sunirand
  • D.P. Tsomocos

    ()

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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Bibliographic Info

Paper provided by Oxford Financial Research Centre in its series OFRC Working Papers Series with number 2008fe26.

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Length: 28
Date of creation: 2008
Date of revision:
Handle: RePEc:sbs:wpsefe:2008fe26

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Web page: http://www.finance.ox.ac.uk
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Keywords: interest rates; monetary base; bank capital; financial stability; monetary policy;

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References

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  1. 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.
  2. Charles Goodhart & Pojanart Sunirand & Dimitrios P. Tsomocos, 2004. "A model to analyse financial fragility: applications," LSE Research Online Documents on Economics 24680, London School of Economics and Political Science, LSE Library.
  3. Dimitrios P Tsomocos & O. AspachsC. GoodhartM. SegovianoL. Zicchino, 2006. "Searching for a Metric for Financial Stability," Economics Series Working Papers 2006-FE-09, University of Oxford, Department of Economics.
  4. Dimitrios Tsomocos & Sudipto Bhattacharya & Charles Goodhart & Pojanart Sunirand, 2007. "Banks, relative performance, and sequential contagion," Economic Theory, Springer, vol. 32(2), pages 381-398, August.
  5. Jeffrey A. Miron, 1990. "The Economics of Seasonal Cycles," NBER Working Papers 3522, National Bureau of Economic Research, Inc.
  6. Tsomocos, Dimitrios P., 2003. "Equilibrium analysis, banking and financial instability," Journal of Mathematical Economics, Elsevier, vol. 39(5-6), pages 619-655, July.
  7. 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.
  8. William Poole, 1969. "Optimal choice of monetary policy instruments in a simple stochastic macro model," Special Studies Papers 2, Board of Governors of the Federal Reserve System (U.S.).
  9. Charles Goodhart & Pojanart Sunirand & Dimitrios P. Tsomocos, 2004. "A risk assessment model for banks," LSE Research Online Documents on Economics 24750, London School of Economics and Political Science, LSE Library.
  10. Lea Zicchino & Dimitrios Tsomocos & Charles Goodhart & Oriol Aspachs Bracon, 2006. "Towards a Measure of Financial Fragility," FMG Discussion Papers dp554, Financial Markets Group.
  11. 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.
  12. Charles A.E. Goodhart & Pojanart Sunirand & Dimitrios P. Tsomocos, 2003. "A Model to Analyse Financial Fragility," OFRC Working Papers Series 2003fe13, Oxford Financial Research Centre.
  13. 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.
  14. 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.
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Cited by:
  1. Dai, Meixing, 2010. "Financial volatility and optimal instrument choice: A revisit to Poole’s analysis," MPRA Paper 28547, University Library of Munich, Germany, revised 02 Feb 2011.
  2. repec:ebl:ecbull:v:30:y:2010:i:1:p:605-613 is not listed on IDEAS
  3. 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.
  4. 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.
  5. Maria Th. Kasselaki & Athanasios O. Tagkalakis, 2013. "Financial soundness indicators and financial crisis episodes," Working Papers 158, Bank of Greece.
  6. Stan du Plessis, 2012. "Assets matter: New and old views of monetary policy," Working Papers 16/2012, Stellenbosch University, Department of Economics.
  7. 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.

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