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Market disequilibrium, monetary policy, and financial markets : insights from new tools

Author

Listed:
  • Jean-Luc Gaffard

    (OFCE & Sciences Po Paris, Université Côte d'Azur)

  • Mauro Napoletano

    (OFCE & Sciences Po Paris, Scuola Superiore Sant'Anna)

Abstract

We revisit the main building blocks of the theoretical models underlying the monetary policy consensus before the Great Recession. We highlight how the failure of these models to prevent the crisis and to provide guidance during the recession were due to the excessive confidence in the ability of markets to coordinate demand and supply, and to the neglect of the role of finance. Furthermore, we outline the main elements of an alternative approach to monetary policy that put emphasis on the processes driving coordination in markets, and on the externalities transmitted by financial inter-linkages. Many elements of this new approach are captured by new classes of models, namely, agent-based and financial network models. We discuss some insights from these models for the conduct of monetary policy, and for its interactions with fiscal and macroprudential policies.

Suggested Citation

  • Jean-Luc Gaffard & Mauro Napoletano, 2018. "Market disequilibrium, monetary policy, and financial markets : insights from new tools," Documents de Travail de l'OFCE 2018-21, Observatoire Francais des Conjonctures Economiques (OFCE).
  • Handle: RePEc:fce:doctra:1821
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    File URL: http://www.ofce.sciences-po.fr/pdf/dtravail/WP2018-21.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Output-inflation dynamics; new-keynesian models; disequilibrium analysis; agent-based models; fiscal monetary policy interactions; quantitative easing policies;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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