Taylor Rule Under Financial Instability

Author/Editor:

Martin Cihak ; Ales Bulir ; Sofía Bauducco

Publication Date:

January 1, 2008

Electronic Access:

Free Full Text. Use the free Adobe Acrobat Reader to view this PDF file

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:

This paper contributes to the analysis of monetary policy in the face of financial instability. In particular, we extend the standard new Keynesian dynamic stochastic general equilibrium (DSGE) model with sticky prices to include a financial system. Our simulations suggest that if financial instability affects output and inflation with a lag and if the central bank has privileged information about credit risk, monetary policy that responds instantly to increased credit risk can trade off more output and inflation instability today for a faster return to the trend than a policy that follows the simple Taylor rule with only the contemporaneous output gap and inflation.

Series:

Working Paper No. 08/18

Subject:

English

Publication Date:

January 1, 2008

ISBN/ISSN:

9781451868807/1018-5941

Stock No:

WPIEA2008018

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

41

Please address any questions about this title to publications@imf.org