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Macroeconomic Stability, Financial Stability, and Monetary Policy Rules

  • Pierre-Richard Agénor
  • Luiz A. Pereira da Silva

This paper reviews arguments for and against attributing explicitly a financial stability objective to monetary policy. The discussion is conducted from the perspective of middle-income countries (MICs), where bank credit plays a critical role both on the supply and demand sides. It also discusses, assuming that a more proactive role is desirable, what monetary policy should react to, to what extent it should be combined with macroprudential regulation (and possibly capital controls), and whether existing models provide adequate benchmarks for studying how these policies interact. The analysis suggests that, on balance, there may be a good case for monetary policy in MICs to go beyond its conventional mandate and address the time dimension of systemic risk—if only during a transitory period, as more is learnt about the implementation and performance of the new macroprudential rules that are currently being discussed.

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Article provided by Wiley Blackwell in its journal International Finance.

Volume (Year): 15 (2012)
Issue (Month): 2 (06)
Pages: 205-224

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Handle: RePEc:bla:intfin:v:15:y:2012:i:2:p:205-224
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  1. Pierre-Richard & K. Alper & L. Pereira da Silva, 2011. "Capital Requirements and Business Cycles with Credit Market Imperfections," Working Papers Series 231, Central Bank of Brazil, Research Department.
  2. Ricardo J. Caballero, 2010. "Macroeconomics after the Crisis: Time to Deal with the Pretense-of-Knowledge Syndrome," NBER Working Papers 16429, National Bureau of Economic Research, Inc.
  3. Broto, Carmen & Díaz-Cassou, Javier & Erce, Aitor, 2011. "Measuring and explaining the volatility of capital flows to emerging countries," Journal of Banking & Finance, Elsevier, vol. 35(8), pages 1941-1953, August.
  4. Clark, Peter B. & Goodhart, Charles A. E. & Huang, Haizhou, 1999. "Optimal monetary policy rules in a rational expectations model of the Phillips curve," Journal of Monetary Economics, Elsevier, vol. 43(2), pages 497-520, April.
  5. Katrin Assenmacher-Wesche & Stefan Gerlach, 2010. "Monetary policy and financial imbalances: facts and fiction," Economic Policy, CEPR;CES;MSH, vol. 25, pages 437-482, 07.
  6. Akira Ariyoshi & Andrei Kirilenko & Inci Ötker & Bernard Laurens & Jorge Iván Canales Kriljenko & Karl Friedrich Habermeier, 2000. "Capital Controls: Country Experiences with Their Use and Liberalization," IMF Occasional Papers 190, International Monetary Fund.
  7. Alan S. Blinder, 2010. "How Central Should the Central Bank Be?," Journal of Economic Literature, American Economic Association, vol. 48(1), pages 123-133, March.
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