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The conduct of monetary policy under risks to financial stability: a game - theoretic approach

Kokores, Ioanna (2009)
Ph.D. thesis, University of Birmingham.

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Asset prices offer useful information for monetary policymakers in the short-term, yet their significant relationship to primary policy-indicators is debated. In one view bubbles are difficult to recognise and central banks should act just against the adverse consequences of their unwinding. The opposite view advocates ‘pre-emptive’ monetary policy as financial imbalances accumulate aiming to forestall such consequences. After reviewing the debate, we evaluate ‘pre-emptive’ monetary policy when financial stability is an explicit objective replacing the output-gap. Modelling a game between a central bank and the financial sector similar to Barro and Gordon (1983), we examine monetary policy under commitment and discretion. In contrast to the relevant literature, we conclude that pre-emptive monetary policy succeeds in better controlling inflation, anchoring inflation expectations and imposing more discipline to the financial sector when committed to a rule. The model is extended to incorporate incomplete information about the policy objectives. We evaluate the effect of vagueness about the central bank’s preferences for financial stability in the behaviour of the central bank and the financial sector, and how reputation-building affects the conduct of discretionary policy. Finally, we discuss the relevance of our conclusions in the light of the global financial crisis initiated in August 2007.

Type of Work:Ph.D. thesis.
Supervisor(s):Sen, Somnath (Professor) and Barrett, C.R.
School/Faculty:Colleges (2008 onwards) > College of Social Sciences
Subjects:HB Economic Theory
Institution:University of Birmingham
Copyright Holders:Ioanna Kokores
ID Code:376
This unpublished thesis/dissertation is copyright of the author and/or third parties. The intellectual property rights of the author or third parties in respect of this work are as defined by The Copyright Designs and Patents Act 1988 or as modified by any successor legislation. Any use made of information contained in this thesis/dissertation must be in accordance with that legislation and must be properly acknowledged. Further distribution or reproduction in any format is prohibited without the permission of the copyright holder.
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