wiiw Seminar Series, 'Crisis Management in Central, East and Southeast Europe: What is to be done?'
Seminar series addressing the impact of the global financial and economic crisis on the CEE, SEE and CIS countries and discussing possible policy responses.Series Details
Monday, 8 February 2010, 5:15 pm
The presentation is based on a paper written with co-authors Sofia Bauducco and Martin Cihak. To provide a rigorous analysis of monetary policy in the face of financial instability, we extend the standard dynamic stochastic general equilibrium model 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 responding 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. This augmented rule leads in some parameterizations to improved outcomes in terms of long-term welfare, however, the welfare impacts of such a rule appear to be negligible.