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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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Paper provided by ZBW - German National Library of Economics in its series EconStor Preprints with number 95979.

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Date of creation: 14 Apr 2014
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Handle: RePEc:zbw:esprep:95979

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

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  9. 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.
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  11. 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.
  12. Jensen Henrik, 2011. "Estimated Interest Rate Rules: Do they Determine Determinacy Properties?," The B.E. Journal of Macroeconomics, De Gruyter, De Gruyter, vol. 11(1), pages 1-22, May.
  13. Michael Woodford, 2003. "Optimal Interest-Rate Smoothing," Review of Economic Studies, Oxford University Press, vol. 70(4), pages 861-886.
  14. Loisel, Olivier, 2009. "Bubble-free policy feedback rules," Journal of Economic Theory, Elsevier, Elsevier, vol. 144(4), pages 1521-1559, July.
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