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Monetary Policy and Credit Cycles: A DSGE Analysis

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  • Florina-Cristina Badarau

    () (Larefi - Laboratoire d'analyse et de recherche en économie et finance internationales - Université Montesquieu - Bordeaux 4)

  • Alexandra Popescu

    () (LEO - Laboratoire d'économie d'Orleans - UO - Université d'Orléans - Université de Tours - CNRS - Centre National de la Recherche Scientifique)

Abstract

The recent fi nancial crisis revealed several flaws in both monetary and fi nancial regulation. Contrary to what was believed, price stability is not a suffi cient condition for financial stability. At the same time, micro-prudential regulation alone becomes insu fficient to ensure the financial stability objective. In this paper, we propose an ex-post analysis of what a central bank could have done to improve the reaction of the economy to the financial bubble. We study by means of a fi nancial accelerator DSGE model the dynamics of our economy when the central bank has, fi rst, only traditional objectives, and second, when an additional financial stability objective is added. Overall, results indicate that a more aggressive monetary policy would have had little success in improving the response of the economy to the financial bubble, as the actions of the central bank would have remained limited by the use of a single instrument, the interest rate.

Suggested Citation

  • Florina-Cristina Badarau & Alexandra Popescu, 2012. "Monetary Policy and Credit Cycles: A DSGE Analysis," Working Papers halshs-00828074, HAL.
  • Handle: RePEc:hal:wpaper:halshs-00828074
    Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-00828074
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    References listed on IDEAS

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    1. R. P. Agenor & K. Alper & L. Pereira da Silva, 2013. "Capital Regulation, Monetary Policy, and Financial Stability," International Journal of Central Banking, International Journal of Central Banking, vol. 9(3), pages 198-243, September.
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    Cited by:

    1. Vivien Lewis & Stefania Villa, 2016. "The Interdependence of Monetary and Macroprudential Policy under the Zero Lower Bound," Working Paper Research 310, National Bank of Belgium.
    2. repec:vls:finstu:v:20:y:2016:i:1:p:37-53 is not listed on IDEAS
    3. Cristina Badarau & Alexandra Popescu, 2015. "Monetary policy and financial stability: what role for the interest rate?," International Economics and Economic Policy, Springer, vol. 12(3), pages 359-374, September.

    More about this item

    Keywords

    bank capital channel; credit cycles; financial stability; monetary policy.; canal du capital bancaire; cycle de cr édit; stabilit é financi ère; politique mon étaire.;

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