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The optimal monetary instrument for prudential purposes

  • Goodhart, C.A.E.
  • Sunirand, P.
  • Tsomocos, D.P.

The purpose of this paper is to assess the choice between adopting a monetary base or an interest rate setting instrument to maintain financial stability. Our results suggest that the interest rate instrument is preferable, since during times of a panic or financial crisis the Central Bank automatically satisfies the increased demand for money. Thus, it prevents sharp losses in asset values and enhanced asset volatility.

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File URL: http://www.sciencedirect.com/science/article/B7CRR-4WXSK2F-1/2/311e48ba13e82b3c099b3c9d4fb101df
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Article provided by Elsevier in its journal Journal of Financial Stability.

Volume (Year): 7 (2011)
Issue (Month): 2 (June)
Pages: 70-77

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Handle: RePEc:eee:finsta:v:7:y:2011:i:2:p:70-77
Contact details of provider: Web page: http://www.elsevier.com/locate/jfstabil

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  1. Dimitrios P Tsomocos & Sudipto Bhattacharya, 2006. "Banks, Relative Performance, and Sequential Contagion," Economics Series Working Papers 2006-FE-10, University of Oxford, Department of Economics.
  2. Charles A.E. Goodhart & Pojanart Sunirand & Dimitrios P. Tsomocos, 2004. "A Model to Analyse Financial Fragility: Applications," OFRC Working Papers Series 2004fe05, Oxford Financial Research Centre.
  3. Dimitrios P Tsomocos, 2004. "A Time Series Analysis of Financial Fragility in the UK Banking System," Economics Series Working Papers 2004-FE-18, University of Oxford, Department of Economics.
  4. Charles Goodhart & Pojanart Sunirand & Dimitrios P. Tsomocos, 2004. "A risk assessment model for banks," LSE Research Online Documents on Economics 24750, London School of Economics and Political Science, LSE Library.
  5. William Poole, 1969. "Optimal choice of monetary policy instruments in a simple stochastic macro model," Special Studies Papers 2, Board of Governors of the Federal Reserve System (U.S.).
  6. Bennett T. McCallum, 1999. "Recent developments in the analysis of monetary policy rules," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 3-12.
  7. Lea Zicchino & Dimitrios Tsomocos & Charles Goodhart & Oriol Aspachs Bracon, 2006. "Towards a Measure of Financial Fragility," FMG Discussion Papers dp554, Financial Markets Group.
  8. Miron, Jeffrey A, 1986. "Financial Panics, the Seasonality of the Nominal Interest Rate, and theFounding of the Fed," American Economic Review, American Economic Association, vol. 76(1), pages 125-40, March.
  9. Charles Goodhart & Pojanart Sunirand & Dimitrios Tsomocos, 2006. "A model to analyse financial fragility," Economic Theory, Springer, vol. 27(1), pages 107-142, 01.
  10. Dimitrios P. Tsomocos, 2003. "Equilibrium Analysis, Banking and Financial Instability," OFRC Working Papers Series 2003fe08, Oxford Financial Research Centre.
  11. Lea Zicchino & Dimitrios Tsomocos & Miguel Segoviano & Charles Goodhart & Oriol Aspachs Bracon, 2006. "Searching for a Metric for Financial Stability," FMG Special Papers sp167, Financial Markets Group.
  12. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-19, June.
  13. M. Shubik & D. Tsomocos, 1992. "A strategic market game with a mutual bank with fractional reserves and redemption in gold," Journal of Economics, Springer, vol. 55(2), pages 123-150, June.
  14. Jeffrey A. Miron, 1990. "The Economics of Seasonal Cycles," NBER Working Papers 3522, National Bureau of Economic Research, Inc.
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