Financial Stability and Monetary Policy: A Reduced-Form Model for the EURO Area
This paper is related to the growing academic literature on monetary policy and financial stability. In the first part, we propose a review of the literature on the subject, describing both theoretical and empirical models. In the second part, based on Filardo’s approach, we construct a reduced-form model for the Euro Area, addressing the need to include the financial stability objective into the ECB monetary policy decisions. The purpose of the paper is to see whether the ECB decisions can be improved if policymakers systematically react to financial instability signals. The novelty of the paper is the introduction of an aggregate financial instability index in the augmented Taylor’s rule that is a part of the proposed model. Our results show that, since the ECB setup until nowadays, the monetary policy decisions were influenced by the financial instability level, as indicated by the optimal policy rate. However, at the beginning and at the end of the analysed interval, we observe a discrepancy between the real key rate and the proposed optimal policy rule. More precisely, for the period 1999-2001, the model shows that the optimal rate ranged bellow the key rate, fact which shows that the ECB has intentionally fixed its initial interest rate to a much higher level in order to strengthen its credibility. In the same line, in 2009 the ECB should have decreased the key rate below the level of 1% to better overcome the lack of liquidity on the market. Our results also show that, towards the end of the analysed period (2010-2011), the ECB should have considerably increased the key rate to respond to inflation threats.
Volume (Year): (2013)
Issue (Month): 1 (March)
|Contact details of provider:|| Postal: Casa Academiei, Calea 13, Septembrie nr.13, sector 5, Bucureşti 761172|
Phone: 004 021 3188148
Fax: 004 021 3188148
Web page: http://www.ipe.ro/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Vasco Cúrdia & Michael Woodford, 2009.
"Credit Spreads and Monetary Policy,"
NBER Working Papers
15289, National Bureau of Economic Research, Inc.
- Stephen G. Cecchetti & Lianfi Li, 2005.
"Do Capital Adequacy Requirements Matter for Monetary Policy?,"
NBER Working Papers
11830, National Bureau of Economic Research, Inc.
- Stephen G. Cecchetti & Lianfa Li, 2008. "Do Capital Adequacy Requirements Matter For Monetary Policy?," Economic Inquiry, Western Economic Association International, vol. 46(4), pages 643-659, October.
- Paolo Angelini & Stefano Neri & Fabio Panetta, 2011.
"Monetary and macroprudential policies,"
Temi di discussione (Economic working papers)
801, Bank of Italy, Economic Research and International Relations Area.
- Vittorio Corbo, 2010. "Financial stability in a crisis: What is the role of the central bank?," BIS Papers chapters, in: Bank for International Settlements (ed.), Perspectives on inflation targeting, financial stability and the global crisis, volume 51, pages 27-30 Bank for International Settlements.
- Charles A. E. Goodhart & Carolina Osorio & Dimitrios P. Tsomocos, 2009. "Analysis of Monetary Policy and Financial Stability: A New Paradigm," CESifo Working Paper Series 2885, CESifo Group Munich.
- Jaromir Baxa & Roman Horvath & Borek Vasicek, 2011.
"Time-Varying Monetary-Policy Rules and Financial Stress: Does Financial Instability Matter for Monetary Policy?,"
2011/03, Czech National Bank, Research Department.
- 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, vol. 9(1), pages 117-138.
- Jaromír Baxa & Roman Horváth & Borek Vasícek, 2011. "Monetary Policy Rules and Financial Stress: Does Financial Instability Matter for Monetary," Working Papers wpdea1101, Department of Applied Economics at Universitat Autonoma of Barcelona.
- Roman Horvath & Jaromir Baxa & Borek Vasicek, 2011. "How Does Monetary Policy Respond to Financial Stress?," EcoMod2011 2769, EcoMod.
- Teranishi, Yuki, 2012.
"Credit spread and monetary policy,"
Elsevier, vol. 114(1), pages 26-28.
- Andrew J. Filardo, 2000. "Monetary policy and asset prices," Economic Review, Federal Reserve Bank of Kansas City, issue Q III, pages 11-37.
- Abdelaziz Rouabah, 2007. "Mesure de la vulnérabilité du secteur bancaire luxembourgeois," BCL working papers 24, Central Bank of Luxembourg.
- Miguel Casares, 2007. "Monetary Policy Rules in a New Keynesian Euro Area Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(4), pages 875-900, 06.
- Jose De Gregorio, 2010. "Recent challenges of inflation targeting," BIS Papers chapters, in: Bank for International Settlements (ed.), Perspectives on inflation targeting, financial stability and the global crisis, volume 51, pages 9-13 Bank for International Settlements.
- Ben S. Bernanke & Mark Gertler, 2001. "Should Central Banks Respond to Movements in Asset Prices?," American Economic Review, American Economic Association, vol. 91(2), pages 253-257, May.
- Mark Illing & Ying Liu, 2003. "An Index of Financial Stress for Canada," Staff Working Papers 03-14, Bank of Canada.
- Claudiu T. Albulescu, 2011. "Economic and Financial Integration of CEECs: The Impact of Financial Instability," Czech Economic Review, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, vol. 5(1), pages 027-045, March.
- Driffill, John & Rotondi, Zeno & Savona, Paolo & Zazzara, Cristiano, 2006. "Monetary policy and financial stability: What role for the futures market?," Journal of Financial Stability, Elsevier, vol. 2(1), pages 95-112, April.
- Andrew J. Filardo, 2001. "Should monetary policy respond to asset price bubbles? : some experimental results," Research Working Paper RWP 01-04, Federal Reserve Bank of Kansas City.
- Dale F. Gray & Robert C. Merton & Zvi Bodie, 2007.
"New Framework for Measuring and Managing Macrofinancial Risk and Financial Stability,"
NBER Working Papers
13607, National Bureau of Economic Research, Inc.
- Dale F. Gray; & Robert C. Merton & Zvi Bodie, 2009. "New Framework for Measuring and Managing Macrofinancial Risk and Financial Stability," Working Papers Central Bank of Chile 541, Central Bank of Chile.
- Hossein Sedghi-Khorasgani, 2010. "Financial Instability and Optimal Monetary Policy Rule," FIW Working Paper series 042, FIW.
- Michael D. Bordo & Olivier Jeanne, 2002.
"Boom-Busts in Asset Prices, Economic Instability, and Monetary Policy,"
NBER Working Papers
8966, National Bureau of Economic Research, Inc.
- Bordo, Michael D & Jeanne, Olivier, 2002. "Boom-Busts in Asset Prices, Economic Instability and Monetary Policy," CEPR Discussion Papers 3398, C.E.P.R. Discussion Papers.
- Christiano, Lawrence & Ilut, Cosmin & Motto, Roberto & Rostagno, Massimo, 2008. "Monetary policy and stock market boom-bust cycles," Working Paper Series 0955, European Central Bank.
- Christopher Kent & Philip Lowe, 1997. "Asset-price Bubbles and Monetary Policy," RBA Research Discussion Papers rdp9709, Reserve Bank of Australia.
- Martin Cihak & Ales Bulir & SofÃa Bauducco, 2008. "Taylor Rule Under Financial Instability," IMF Working Papers 08/18, International Monetary Fund.
- Brousseau, Vincent & Detken, Carsten, 2001. "Monetary policy and fears of financial instability," Working Paper Series 0089, European Central Bank.
- Alicia García Herrero & Pedro del Río, 2003. "Financial stability and the design of monetary policy," Working Papers 0315, Banco de España;Working Papers Homepage.
- Stephen G. Cecchetti & Hans Genberg & Sushil Wadhwani, 2002. "Asset Prices in a Flexible Inflation Targeting Framework," NBER Working Papers 8970, National Bureau of Economic Research, Inc.
- Granville, Brigitte & Mallick, Sushanta, 2009. "Monetary and financial stability in the euro area: Pro-cyclicality versus trade-off," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 19(4), pages 662-674, October.
- Adam Gersl & Jaroslav Hermanek, 2007. "Financial Stability Indicators: Advantages and Disadvantages of their Use in the Assessment of Financial System Stability," Occasional Publications - Chapters in Edited Volumes, in: CNB Financial Stability Report 2006, chapter 0, pages 69-79 Czech National Bank, Research Department.
- Albulescu, Claudiu Tiberiu, 2010. "Forecasting The Romanian Financial System Stability Using A Stochastic Simulation Model," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(1), pages 81-98, March.
When requesting a correction, please mention this item's handle: RePEc:rjr:romjef:v::y:2013:i:1:p:62-81. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Corina Saman)
If references are entirely missing, you can add them using this form.