After the Financial Crisis
Edited by Sylvester Eijffinger and Donato Masciandaro
Chapter 10: Time Varying Monetary Policy Rules and Financial Stress
Jaromír Baxa, Roman Horváth and Bořek Vašíček1 Introduction The recent financial crisis has intensified the interest in exploring the interactions between monetary policy and financial stability. Official interest rates were driven sharply to historic lows and many unconventional measures were used to pump liquidity into the international financial system. Central banks pursued monetary policy under high economic uncertainty coupled with large financial shocks in many countries. The financial crisis also raised new challenges for central bank policies, in particular how to operationalize the issues related to financial stability for monetary policy decision-making (Goodhart, 2006; Borio and Drehmann, 2009). This chapter seeks to analyze whether and how central banks reacted to the periods of financial instability, and in particular whether and how the interest-setting process evolved in response to financial instability over the last three decades. The monetary policy of central banks is likely to react to financial instability in a non-linear way (Goodhart et al., 2009). When a financial system is stable, the interest We gratefully acknowledge the support from Czech Science Foundation research grant no. P402/11/1487. We thank Øyvind Eitrheim, Ekkehart Schlicht, Miloslav Vošvrda and the seminar participants at the 7th Norges Annual Monetary Policy Conference, the Institute of Information Theory and Automation (Academy of Sciences of the Czech Republic), Universitat de Barcelona, Universitat de Girona, Universitat de les Illes Balears and Universidad Complutense de Madrid for helpful discussions. The views expressed in this paper are not necessarily those of the Czech National Bank....
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