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Financial Instability and Optimal Monetary Policy Rule

Author

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  • Hossein Sedghi-Khorasgani

Abstract

This paper investigates the effect of financial instability on the design of monetary policy rule for a small open economy. We find evidence that optimal monetary policy rule reacts directly to financial imbalances and, as a result, to the real exchange rate movements. However, optimal rule would not react to the real exchange rate changes directly if central bank does not care about the financial instability. For a quantitative analysis, impulse responses of some macroeconomic variables and financial instability to the domestic productivity and foreign country output shocks, resulting from simulation, are also analysed in this paper.

Suggested Citation

  • Hossein Sedghi-Khorasgani, 2010. "Financial Instability and Optimal Monetary Policy Rule," FIW Working Paper series 042, FIW.
  • Handle: RePEc:wsr:wpaper:y:2010:i:042
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    Cited by:

    1. Albulescu, Claudiu Tiberiu, 2013. "Financial Stability and Monetary Policy: A Reduced-Form Model for the EURO Area," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(1), pages 62-81, March.

    More about this item

    Keywords

    Financial instability; Optimal monetary policy rule; Real exchange rate; Open economy;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G01 - Financial Economics - - General - - - Financial Crises

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