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Financial cycle and conduct of monetary policy: The amplifier/divider theory

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  • CHAFIK, Omar

Abstract

The financial cycle can play a decisive role in the transmission of monetary policy decisions. The impact of these decisions is amplified when the financial cycle is positive, and it is compressed when this cycle is negative. Considering this amplifier/divider mechanism in a semi-structural NKM, estimated for the US economy using Bayesian techniques, confirms this conclusion and improves the decision of raising or lowering the interest rate. The information on the financial cycle also allows a better identification of the inflationary and disinflationary pressures due to the impact of this cycle on the balance between supply and demand of the economy through its action on financing conditions.

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  • CHAFIK, Omar, 2018. "Financial cycle and conduct of monetary policy: The amplifier/divider theory," MPRA Paper 89170, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:89170
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    Cited by:

    1. CHAFIK, Omar, 2019. "Monetary policy in oil exporting countries with fixed exchange rate and open capital account: expectations matter," MPRA Paper 92558, University Library of Munich, Germany.

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    More about this item

    Keywords

    Financial cycle; monetary policy; New Keynesian Model; output gap; Bayesian estimation.;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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