{
  "title": "Taylor Rule Under Financial Instability",
  "publication": "IMF Working Papers, January 1, 2008",
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  "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.",
  "sections": [
    {
      "heading": "Overview and research question",
      "content": "- Authors: Martin Cihak, Sofía Bauducco\n- Date: January 1, 2008\n- Series: Working Paper No. 2008/018\n- Issue: 018; Volume: 2008; Pages: 41\n- DOI: https://doi.org/10.5089/9781451868807.001\n- Subjects: Banking, Central bank policy rate, Financial sector, Loans, Technology\n- Keywords: financial system, goods firm, monetary policy, output gap, WP"
    },
    {
      "heading": "Model extension and methodology",
      "content": "- Extends the standard new Keynesian dynamic stochastic general equilibrium (DSGE) model with sticky prices to include a financial system.\n- Simulations are used to assess monetary-policy responses under financial instability.\n- Key informational assumption: the central bank may have privileged information about credit risk."
    },
    {
      "heading": "Main findings",
      "content": "- If financial instability affects output and inflation with a lag, and the central bank has privileged information about credit risk, then:\n  - 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.\n- The paper's simulations indicate that incorporating credit-risk information into policy responses can improve the speed of recovery to trend relative to a contemporaneous-output-gap-and-inflation-only Taylor rule."
    },
    {
      "heading": "Policy implications and recommendations",
      "content": "- Monetary-policy rules that incorporate indicators of financial stress or credit risk (including timely or privileged measures) can be preferable to simple Taylor-type rules that condition only on contemporaneous output gap and inflation when financial instability is present.\n- Accepting higher short-run output and inflation variability may be warranted if it delivers a faster return to trend output and inflation in the presence of financial shocks that operate with lags."
    },
    {
      "heading": "Publication and access",
      "content": "- Stock No: WPIEA2008018\n- ISBN: 9781451868807\n- ISSN: 1018-5941\n\nSource: Taylor Rule Under Financial Instability, IMF Working Papers (Working Paper No. 2008/018).\n\n---\n\n Content in this bundle\n\n- wp0818\n  - wp0818 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - wp0818 (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2016/12/31/taylor-rule-under-financial-instability-21614"
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    "Authors: Martin Cihak, Sofía Bauducco",
    "Published: January 1, 2008",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781451868807.001",
    "Authors: Martin Cihak, Sofía Bauducco",
    "Date: January 1, 2008",
    "Series: Working Paper No. 2008/018",
    "Issue: 018; Volume: 2008; Pages: 41",
    "DOI: https://doi.org/10.5089/9781451868807.001",
    "Subjects: Banking, Central bank policy rate, Financial sector, Loans, Technology",
    "Keywords: financial system, goods firm, monetary policy, output gap, WP",
    "Extends the standard new Keynesian dynamic stochastic general equilibrium (DSGE) model with sticky prices to include a financial system.",
    "Simulations are used to assess monetary-policy responses under financial instability.",
    "Key informational assumption: the central bank may have privileged information about credit risk.",
    "If financial instability affects output and inflation with a lag, and the central bank has privileged information about credit risk, then:",
    "The paper's simulations indicate that incorporating credit-risk information into policy responses can improve the speed of recovery to trend relative to a contemporaneous-output-gap-and-inflation-only Taylor rule.",
    "Monetary-policy rules that incorporate indicators of financial stress or credit risk (including timely or privileged measures) can be preferable to simple Taylor-type rules that condition only on contemporaneous output gap and inflation when financial instability is present.",
    "Accepting higher short-run output and inflation variability may be warranted if it delivers a faster return to trend output and inflation in the presence of financial shocks that operate with lags.",
    "Stock No: WPIEA2008018",
    "ISBN: 9781451868807",
    "ISSN: 1018-5941",
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