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Financial volatility and optimal instrument choice: A revisit to Poole's analysis

  • Meixing Dai

    ()

    (BETA, University of Strasbourg, France)

In this paper, using an IS-LM model with reserve market, we examine weather the operating procedure actually adopted by many central banks in the world, i.e. targeting directly short run interest rates and hence indirectly market interest rates, is more efficient in stabilizing output than a monetary base operating procedure if shocks affecting the interest rate policy are taken into account. Our results suggest that for an interest rate policy to be more efficient than a monetary aggregate oriented policy, central banks should directly target market interest rates which are narrowly linked to the aggregate spending.

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File URL: http://www.accessecon.com/Pubs/EB/2010/Volume30/EB-10-V30-I1-P55.pdf
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Article provided by AccessEcon in its journal Economics Bulletin.

Volume (Year): 30 (2010)
Issue (Month): 1 ()
Pages: 605-613

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Handle: RePEc:ebl:ecbull:eb-10-00024
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  1. Michael Woodford, 2007. "How Important is Money in the Conduct of Monetary Policy?," Levine's Working Paper Archive 122247000000001419, David K. Levine.
  2. C.A.E. Goodhart & P. Sunirand & D.P. Tsomocos, 2008. "The Optimal Monetary Instrument for Prudential Purposes," OFRC Working Papers Series 2008fe26, Oxford Financial Research Centre.
  3. Waller, Christopher J., 1990. "Administering the window : A game-theoretic model of discount-window borrowing," Journal of Monetary Economics, Elsevier, vol. 25(2), pages 273-287, March.
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  9. Carl E. Walsh, 2003. "Monetary Theory and Policy, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232316, June.
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  11. Sargent, Thomas J & Wallace, Neil, 1975. ""Rational" Expectations, the Optimal Monetary Instrument, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 83(2), pages 241-54, April.
  12. Paul De Grauwe & Daniel Gros, 2009. "A New Two-Pillar Strategy for the ECB," CESifo Working Paper Series 2818, CESifo Group Munich.
  13. McCallum, Bennett T & Hoehn, James G, 1983. "Instrument Choice for Money Stock Control with Contemporaneous and Lagged Reserve Requirements: A Note," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 15(1), pages 96-101, February.
  14. Modigliani, Franco & Rasche, Robert & Cooper, J Philip, 1970. "Central Bank Policy, the Money Supply, and the Short-Term Rate of Interest," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 2(2), pages 166-218, May.
  15. Collard, Fabrice & Dellas, Harris, 2005. "Poole in the New Keynesian model," European Economic Review, Elsevier, vol. 49(4), pages 887-907, May.
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  17. Goodfriend, Marvin, 1983. "Discount window borrowing, monetary policy, and the post-October 6, 1979 federal reserve operating procedure," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 343-356, September.
  18. Mathias Hoffmann & Bernd Kempa, 2009. "A Poole Analysis in the New Open Economy Macroeconomic Framework ," Review of International Economics, Wiley Blackwell, vol. 17(5), pages 1074-1097, November.
  19. VanHoose, David D, 1985. "Bank Market Structure and Monetary Control," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 17(3), pages 298-311, August.
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