(Un)Anticipated Monetary Policy in a DSGE Model with a Shadow Banking System

43 Pages Posted: 27 Apr 2013  

Fabio Verona

Bank of Finland - Research

Manuel M. F. Martins

University of Porto, CEMPRE, Faculdade de Economia

Inês Drumond

Universidade do Porto - Faculdade de Economia (FEP)

Date Written: April 11, 2013

Abstract

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

Verona, Fabio and Martins, Manuel M. F. and Drumond, Inês, (Un)Anticipated Monetary Policy in a DSGE Model with a Shadow Banking System (April 11, 2013). Bank of Finland Research Discussion Paper No. 4/2013. Available at SSRN: https://ssrn.com/abstract=2256278 or http://dx.doi.org/10.2139/ssrn.2256278

Fabio Verona (Contact Author)

Bank of Finland - Research ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland

HOME PAGE: http://bofcris.solenovo.fi/crisyp/disp/_/en/cr_redir_all/fet/fet/sea?direction=3&id=3827426

Manuel Mota Freitas Martins

University of Porto, CEMPRE, Faculdade de Economia ( email )

4200-464 Porto
Portugal

Inês Drumond

Universidade do Porto - Faculdade de Economia (FEP) ( email )

Porto
Portugal

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