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Monetary policy and the dynamic disequilibrium

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  • July Radev

Abstract

The research is motivated by the models of non-walrasian disequilibrium and the attempts to set up a concept of monetary policy in the summary framework of dynamic stochastic general equilibrium (DSGE). The key points in the analysis are the imbalances investment-savings and the "gap" between market real interest rate and natural rate of interest, generated by real and nominal shocks and different forms of friction. The main focus is the role of the natural interest rate that balances savings and investment at general equilibrium. The analysis changes some traditional perceptions of alternative rules for managing of interest rate as a part of monetary policy. In particular, the article highlights the advantages of adaptive versus optimization rules for interest rate, where information on natural interest rate is not enough and the principle of Taylor is inapplicable due to the limited response of the central bank to the excess inflation/deflation.

Suggested Citation

  • July Radev, 2017. "Monetary policy and the dynamic disequilibrium," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 1, pages 96-114.
    • Handle: RePEc:bas:econth:y:2017:i:1:p:96-114
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    More about this item

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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