Cover IMF Working Papers
Taylor Rule Under Financial Instability
Author: Mr. Martin Cihakhttps://orcid.org/0000-0002-3571-9707, Mr. Ales Bulir, and Sofía Bauducco
Series:
IMF Working Papers
Volume/Issue:
Volume 2008: Issue 018
Language:
English
Publication Date:
01 Jan 2008
DOI:
https://doi.org/10.5089/9781451868807.001
ISBN:
9781451868807
ISSN:
1018-5941
Pages:
41
Keywords:
WP; financial system; monetary policy; output gap; goods firm
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
Download PDF (1.1 MB) Download Epub
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.
Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund