Work detail

Should monetary policy pay attention to financial stability? A DSGE approach

Author: Mgr. Jan Žáček
Year: 2016 - summer
Leaders: doc. Mgr. Tomáš Holub Ph.D.
Consultants:
Work type: EEI & EP
Masters
Language: English
Pages: 88
Awards and prizes:
Link: https://is.cuni.cz/webapps/zzp/detail/166400/
Abstract: After the recent financial crisis of 2007, a connection between monetary policy and
financial stability has started to be thoroughly investigated. One of the particular
areas of this research field deals with the role of various financial variables in the
monetary policy rules. The main purpose of this research is to find whether
direct incorporation of the financial variables in the monetary policy rule can
bring macroeconomic benefits in terms of lower volatility of inflation and output.
So far, the main emphasis of the research has been placed on the investigation of
the augmented Taylor rules in the context of a closed economy. This thesis sheds
light on the performance of the augmented Taylor rules in a small open economy.
For this purpose, a New Keynesian DSGE model with two types of financial
frictions is constructed. The model is calibrated for the Czech Republic. The
thesis provides four conclusions. First, incorporation of the financial variables
(asset prices and the volume of credit) in the monetary policy rule is beneficial
for macroeconomic stabilization in terms of lower implied volatilities of inflation
and output. Second, the usefulness of the augmented monetary policy rule is the
most apparent in case of the shock originating abroad. Third, there is a strong
link between the financial and the real side of an economy. Fourth, if the banking
sector experiences a sharp drop in bank capital that brings this sector into decline
that further translates into the whole economy, monetary policy is not able to
achieve macroeconomic stability using its conventional tools.

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