Modern Monetary Rules: Any Role for Financial Targeting?: This research has been partly conducted while my PhD studies (European Doctorate in Economics - Erasmus Mundus) at the University of Amsterdam and Bielefeld University. Any views expressed are only those of author and do not necessarily represent the views of the EIB
In: Monetary Policy in the Context of the Financial Crisis: New Challenges and Lessons
Abstract We test the determinacy properties of the standard and financial-sector-augmented Taylor rules in a new Keynesian model with a presence of banking activities. We extend the basic fully rational environment to the setting with heterogeneous expectations. We observe that the benefits from extra financial targeting are limited. Financial targeting, if well designed, can compensate for the improper output-gap targeting through the financial-production channel. The analysis demonstrates however possible threats resulting from the misspecification of the augmented rule. A determinate mix of output-gap and inflation weights can turn indeterminate if compensated by too extreme financial targeting. The results are robust to the presence of heterogeneous expectations.
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