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The Extreme Risk Problem for Monetary Policies of the Euro-Candidates

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  • Gabrisch, Hubert
  • Orlowski, Lucjan T.

Abstract

We argue that monetary policies in euro-candidate countries should also aim at mitigating excessive instability of the key target and instrument variables of monetary policy during turbulent market periods. Our empirical tests show a significant degree of leptokurtosis, thus prevalence of tail-risks, in the conditional volatility series of such variables in the euro-candidate countries. Their central banks will be well-advised to use both standard and unorthodox (discretionary) tools of monetary policy to mitigate such extreme risks while steering their economies out of the crisis and through the euroconvergence process. Such policies provide flexibility that is not embedded in the Taylor-type instrument rules, or in the Maastricht convergence criteria.

Suggested Citation

  • Gabrisch, Hubert & Orlowski, Lucjan T., 2010. "The Extreme Risk Problem for Monetary Policies of the Euro-Candidates," IWH Discussion Papers 12/2010, Halle Institute for Economic Research (IWH).
  • Handle: RePEc:zbw:iwhdps:iwh-12-10
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    References listed on IDEAS

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    Cited by:

    1. Buscher, Herbert S. & Gabrisch, Hubert, 2011. "What Might Central Banks Lose or Gain in Case of Euro Adoption – A GARCH-Analysis of Money Market Rates for Sweden, Denmark and the UK," IWH Discussion Papers 9/2011, Halle Institute for Economic Research (IWH).

    More about this item

    Keywords

    monetary policy rules; tail-risks; convergence to the euro; global financial crisis; equity market risk; interest rate risk; exchange rate risk; Regeln der Geldpolitik; Tail-Risks; Euro-Konvergenz; weltweite Finanzkrise; Vermögensrisiko; Zinsrisiko; Wechselkursrisiko;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • P34 - Economic Systems - - Socialist Institutions and Their Transitions - - - Finance

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