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Stability and Identification with Optimal Macroprudential Policy Rules

  • Chatelain, Jean-Bernard
  • Ralf, Kirsten

This paper investigates the identification, the determinacy and the stability of ad hoc, "quasi-optimal" and optimal policy rules augmented with financial stability indicators (such as asset prices deviations from their fundamental values) and minimizing the volatility of the policy interest rates, when the central bank precommits to financial stability. Firstly, ad hoc and quasi-optimal rules parameters of financial stability indicators cannot be identified. For those rules, non zero policy rule parameters of financial stability indicators are observationally equivalent to rule parameters set to zero in another rule, so that they are unable to inform monetary policy. Secondly, under controllability conditions, optimal policy rules parameters of financial stability indicators can all be identified, along with a bounded solution stabilizing an unstable economy as in Woodford (2003), with determinacy of the initial conditions of non- predetermined variables.

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File URL: http://mpra.ub.uni-muenchen.de/55293/1/MPRA_paper_55293.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 55282.

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Date of creation: 12 Apr 2014
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Handle: RePEc:pra:mprapa:55282
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  1. Edouard Challe & Chryssi Giannitsarou, 2012. "Stock Prices And Monetary Policy Shocks: A General Equilibrium Approach," Working Papers hal-00719956, HAL.
  2. Andrew Blake & Tatiana Kirsanova, 2008. "Discretionary Policy and Multiple Equilibria in LQ RE Models," Discussion Papers 0813, Exeter University, Department of Economics.
  3. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-11, July.
  4. Burmeister, Edwin, 1980. "On Some Conceptual Issues in Rational Expectations Modeling," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 12(4), pages 800-816, November.
  5. Denis Beau & Christophe Cahn & Laurent Clerc & Benoît Mojon, 2013. "Macro-Prudential Policy and the Conduct of Monetary Policy," Working Papers Central Bank of Chile 715, Central Bank of Chile.
  6. John H. Cochrane, 2007. "Determinacy and Identification with Taylor Rules," NBER Working Papers 13410, National Bureau of Economic Research, Inc.
  7. Danyang Xie, 2002. "On Time Inconsistency: A Technical Issue in Stackelberg Differential Games," Macroeconomics 0212004, EconWPA.
  8. Calvo, Guillermo A, 1978. "On the Time Consistency of Optimal Policy in a Monetary Economy," Econometrica, Econometric Society, vol. 46(6), pages 1411-28, November.
  9. Michael Woodford, 2003. "Optimal Interest-Rate Smoothing," Review of Economic Studies, Wiley Blackwell, vol. 70(4), pages 861-886, October.
  10. Levine, Paul & Currie, David, 1987. "The design of feedback rules in linear stochastic rational expectations models," Journal of Economic Dynamics and Control, Elsevier, vol. 11(1), pages 1-28, March.
  11. Thomas Christiaans, 2013. "Economic Crises, Housing Price Bubbles And Saddle-Point Economics," Metroeconomica, Wiley Blackwell, vol. 64(1), pages 197-214, 02.
  12. Jensen Henrik, 2011. "Estimated Interest Rate Rules: Do they Determine Determinacy Properties?," The B.E. Journal of Macroeconomics, De Gruyter, vol. 11(1), pages 1-22, May.
  13. Loisel, Olivier, 2009. "Bubble-free policy feedback rules," Journal of Economic Theory, Elsevier, vol. 144(4), pages 1521-1559, July.
  14. Jagjit S. Chadha & Germana Corrado & Luisa Corrado, 2013. "Stabilisation Policy in a Model of Consumption, Housing Collateral and Bank Lending," Studies in Economics 1316, School of Economics, University of Kent.
  15. Evren Caglar & Jagjit S. Chadha & Katsuyuki Shibayama, 2012. "Bayesian Estimation of DSGE Models: Is the Workhorse Model Identified?," Koç University-TUSIAD Economic Research Forum Working Papers 1205, Koc University-TUSIAD Economic Research Forum.
  16. Guido Lorenzoni, 2010. "Optimal Monetary Policy with Uncertain Fundamentals and Dispersed Information ," Review of Economic Studies, Oxford University Press, vol. 77(1), pages 305-338.
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