Taylor Rule Under Financial Instability

43 Pages Posted: 4 Feb 2008

See all articles by Martin Čihák

Martin Čihák

International Monetary Fund (IMF)

Sofia Bauducco

affiliation not provided to SSRN

Aleš Bulíř

International Monetary Fund (IMF)

Date Written: Janurary 2008

Abstract

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.

Keywords: Monetary policy, Inflation, Credit risk, Financial stability

Suggested Citation

Cihak, Martin and Bauducco, Sofia and Bulir, Ales, Taylor Rule Under Financial Instability (Janurary 2008). IMF Working Papers, Vol. , pp. 1-41, 2008. Available at SSRN: https://ssrn.com/abstract=1089684

Martin Cihak (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street N.W.
Washington, DC 20431
United States

Sofia Bauducco

affiliation not provided to SSRN

No Address Available

Ales Bulir

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

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