Incorporating Financial Stability in Inflation Targeting Frameworks

September 1, 2011

Preview Citation

Format: Chicago

Burcu Aydin, and Engin Volkan. Incorporating Financial Stability in Inflation Targeting Frameworks, (USA: International Monetary Fund, 2011) accessed September 18, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

The global financial crisis has exposed the limitations of a conventional inflation targeting (IT) framework in insulating an economy from shocks, and demonstrated that its rigid application may aggravate the effect of shocks on output and inflation. Accordingly, we investigate possible refinements to the IT framework by incorporating financial stability considerations. We propose a small open economy DSGE model, calibrated for Korea during the period of 2003 - 07, with real and financial frictions. The findings indicate that incorporating financial stability considerations can help smooth business cycle fluctuations more effectively than a conventional IT framework.

Subject: Banking, Consumption, Financial sector policy and analysis, Financial sector stability, Housing, Labor, National accounts, Return on investment, Self-employment

Keywords: Base interest rate, Capital utilization rate, Central bank, Consumption, Country risk risk premium, Demand shock, Depreciation rate, DSGE, Financial accelerator, Financial sector stability, Financial stability, Global, Housing, Inflation targeting, Inflation targeting rule, Inflation-targeting policy, Interest rate rule, Investment goods, IT framework, ITFS rule, Monetary policy, Reaction function, Return on investment, Risk premium, Self-employment, WP

Publication Details

Pages:

45
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2011/224
Stock No:

WPIEA2011224
ISBN:

9781463904326
ISSN:

1018-5941

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