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Monetary policy flexibility, risk management, and financial disruptions

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  • Mishkin, Frederic S.

Abstract

This paper argues that the monetary policy that is appropriate during an episode of financial market disruption is likely to be quite different than in times of normal market functioning. When financial markets experience a significant disruption, a systematic approach to risk management requires policymakers to be preemptive in responding to the macroeconomic implications of incoming financial market information, and decisive actions may be required to reduce the likelihood of an adverse feedback loop. The central bank also needs to exhibit flexibility--that is, less inertia and gradualism than would otherwise be typical--not only in moving decisively to reduce downside risks arising from a financial market disruption, but also in being prepared to take back some of that insurance in response to a recovery in financial markets or an upward shift in inflation risks.

Suggested Citation

  • Mishkin, Frederic S., 2010. "Monetary policy flexibility, risk management, and financial disruptions," Journal of Asian Economics, Elsevier, vol. 21(3), pages 242-246, June.
  • Handle: RePEc:eee:asieco:v:21:y:2010:i:3:p:242-246
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    References listed on IDEAS

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    Cited by:

    1. Mishkin, Frederic S., 2017. "Rethinking monetary policy after the crisis," Journal of International Money and Finance, Elsevier, vol. 73(PB), pages 252-274.
    2. Baxa, Jaromír & Horváth, Roman & Vašíček, Bořek, 2013. "Time-varying monetary-policy rules and financial stress: Does financial instability matter for monetary policy?," Journal of Financial Stability, Elsevier, pages 117-138.
    3. Byrne, Joseph P & Korobilis, Dimitris & Ribeiro, Pinho J, 2014. "On the Sources of Uncertainty in Exchange Rate Predictability," MPRA Paper 58956, University Library of Munich, Germany.
    4. Gozgor, Giray, 2014. "Determinants of domestic credit levels in emerging markets: The role of external factors," Emerging Markets Review, Elsevier, vol. 18(C), pages 1-18.
    5. Malmendier, Ulrike M. & Nagel, Stefan & Yan, Zhen, 2017. "The Making of Hawks and Doves: Inflation Experiences on the FOMC," CEPR Discussion Papers 11902, C.E.P.R. Discussion Papers.
    6. Tamim Bayoumi & Giovanni Dell'Ariccia & Karl F Habermeier & Tommaso Mancini Griffoli & Fabian Valencia, 2014. "Monetary Policy in the New Normal," IMF Staff Discussion Notes 14/3, International Monetary Fund.
    7. Bradley Jones, 2015. "Asset Bubbles; Re-thinking Policy for the Age of Asset Management," IMF Working Papers 15/27, International Monetary Fund.
    8. Zhang, Zhiwei & Zhang, Wenlang, 2011. "The road to recovery: Fiscal stimulus, financial sector rehabilitation, and potential risks ahead," Journal of Asian Economics, Elsevier, vol. 22(4), pages 311-321, August.
    9. Jaromír Baxa & Roman Horváth & Bořek Vašíček, 2011. "Time Varying Monetary Policy Rules and Financial Stress," Chapters,in: Handbook of Central Banking, Financial Regulation and Supervision, chapter 10 Edward Elgar Publishing.
    10. Ruthira Naraidoo & Leroi Raputsoane, 2015. "Financial markets and the response of monetary policy to uncertainty in South Africa," Empirical Economics, Springer, pages 255-278.
    11. Thi Hong Hanh Pham, 2015. "Determinants of Bank Lending," Working Papers hal-01158241, HAL.
    12. Chiu, Ching-Wai (Jeremy) & Hacioglu Hoke, Sinem, 2016. "Macroeconomic tail events with non-linear Bayesian VARs," Bank of England working papers 611, Bank of England.
    13. Blau, Benjamin M. & Brough, Tyler J. & Thomas, Diana W., 2013. "Corporate lobbying, political connections, and the bailout of banks," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 3007-3017.

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