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(Un)anticipated Monetary Policy in a DSGE Model with a Shadow Banking System

Listed author(s):
  • F. Verona

    (Bank of Finland)

  • M. M. F. Martins

    (University of Porto, CEF.UP)

  • I. Drumond

    (DG-ECFIN, European Commission)

Motivated by the U.S. events of the 2000s, we address whether a too low for too long interest rate policy may generate a boom-bust cycle. We simulate anticipated and unanticipated monetary policies in state-of-the-art DSGE models and in a model with bond financing via a shadow banking system, in which the bond spread is calibrated for normal and optimistic times. Our results suggest that the U.S. boom-bust was caused by the combination of (i) too low for too long interest rates, (ii) excessive optimism, and (iii) a failure of agents to anticipate the extent of the abnormally favorable conditions.

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Article provided by International Journal of Central Banking in its journal International Journal of Central Banking.

Volume (Year): 9 (2013)
Issue (Month): 3 (September)
Pages: 78-124

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Handle: RePEc:ijc:ijcjou:y:2013:q:3:a:3
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