Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/212296 
Year of Publication: 
2014
Series/Report no.: 
Bank of Finland Research Discussion Papers No. 21/2014
Publisher: 
Bank of Finland, Helsinki
Abstract: 
We assess the performance of optimal Taylor-type interest rate rules, with and without reaction to financial variables, in stabilizing an economy following financial shocks. The analysis is conducted in a DSGE model with loan and bond markets, each featuring financial frictions. This allows for a wide set of financial shocks and transmission mechanisms and can be calibrated to match the bond-to-bank finance ratio featured in the US financial system. Overall, we find that monetary policy that reacts to credit growth, a form of the so-called "leaning against the wind", improves the ability of the central bank to achieve its mandate in the wake of financial shocks. The specific policy implications depend partly on the origin and the persistence of the financial shock, but overall not on the assignment of a mandate for financial stability in the central bank's objective function.
Subjects: 
financial shocks
optimal monetary policy
Taylor rules
DSGE models
bond market
loan market
JEL: 
E32
E44
E52
Persistent Identifier of the first edition: 
ISBN: 
978-952-6699-95-0
Document Type: 
Working Paper

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