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Monetary policy and financial stability: what role for the interest rate?

Author

Listed:
  • Cristina Badarau

    (Larefi - Laboratoire d'analyse et de recherche en économie et finance internationales - UB - Université de Bordeaux)

  • Alexandra Popescu

Abstract

We propose an ex-post analysis of the behavior of a central bank confronted with financial turmoil. For this purpose, we rely on a DSGE model that combines credit market frictions with a boom and bust scenario on the price of capital. Within this framework, we seek to understand the extent to which central banks could have intervened to limit the effects of the financial bubble and its bursting. We compare the results obtained in terms of economic stabilization under a simple Taylor rule with those of an augmented rule that takes into account a financial indicator. We show that a central bank using as sole instrument the interest rate cannot simultaneously improve inflation and credit cycles.

Suggested Citation

  • Cristina Badarau & Alexandra Popescu, 2015. "Monetary policy and financial stability: what role for the interest rate?," Post-Print hal-03894570, HAL.
    • Handle: RePEc:hal:journl:hal-03894570
    DOI: 10.1007/s10368-014-0307-6
    as

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