(Un)Anticipated Monetary Policy in a DSGE Model with a Shadow Banking System
43 Pages Posted: 27 Apr 2013
Date Written: April 11, 2013
Motivated by the U.S. events of the 2000s, we address whether a too low for too long interest rate policy may generate a boom-bust cycle. We simulate anticipated and unanticipated monetary policies in state-of-the-art DSGE models and in a model with bond financing via a shadow banking system, in which the bond spread is calibrated for normal and optimistic times. Our results suggest that the U.S. boom-bust was caused by the combination of (i) interest rates that were too low for too long, (ii) excessive optimism and (iii) a failure of agents to anticipate the extent of the abnormally favourable conditions.
Keywords: DSGE model, shadow banking system, too low for too long, boom-bust
JEL Classification: E32, E44, E52, G24
Suggested Citation: Suggested Citation