Advertisement

Optimal Monetary Policy for Commercial Banks Involving Lending Rate Settings and Default Rates

  • Simone Casellina
  • Mariacristina UbertiEmail author
Chapter

Abstract

In the modern industrial economies, the interest rates dynamics are influenced by the decisions of the Money Authority. With these decisions the Central Bank of a country wields a direct control on the trend of short–term interest rates and, through this way, it is in a position to influence indirectly the long–term interest rates. Typically the Money Authority resorts to this possibility with the aim to limit the fluctuations of the main economic variables. So that an immediate connection is established between the trend of the interest rates and the macro–economic variables with respect to the Central Bank, that is institutionally to have an influence.

Within this framework, for example, the monetary policy rule introduced by Taylor (1993) provides the short–term interest rate as a function of the inflation rate and a measure of the business cycle. This approach is supported by the assumptions that the main objectives of the Central Bank are the control of the raise in prices as well as the real economy fluctuations. The efficaciousness of this relation–that explains in a simple way the behaviour of the short–term rates – has fostered empirical as well as theoretical studies.

Keywords

Interest Rate Monetary Policy Commercial Bank Real Interest Rate Policy Rule 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

Notes

Acknowledgements

This research was partially supported by MIUR (Ministero dell’Istruzione, dell’Università e della Ricerca scientifica), Italy. The authors are grateful to an anonymous referee for his profitable comments and suggestions.

References

  1. Campbell, J., & Shiller, R. (1991). Yield spreads and interest rate movements: A bird’s eye view. Review of Economic Studies, 58, 495–514.CrossRefGoogle Scholar
  2. Casellina, S., & Uberti, M. (2008). Optimal monetary policy and long-term interest rate dynamics: Taylor rule extensions. Computational Economics, 32, 183–198.CrossRefGoogle Scholar
  3. Christensen, A. M., & Nielsen, H. B. (2005). US monetary policy 1988–2004: An empirical analysis (FRU Working Papers No. 2005/01). Department of Economics (formerly Institute of Economics), University of Copenhagen.Google Scholar
  4. Dennis, R. (2004). Solving for optimal simple rules in rational expectations models. Journal of Economic Dynamics and Control, 28, 1635–1660.CrossRefGoogle Scholar
  5. Gerlach-Kristen, P. (2003). Interest rate reaction functions and the TR in the Euro area (ECB Working Paper series No. 258).Google Scholar
  6. Marcucci, J., & Quagliariello, M. (2008). Credit risk and business cycle over different regimes, Banca d’Italia, Temi di discussione (Working Papers), 670.Google Scholar
  7. McCallum, B. (2005). Monetary policy and the term structure of interest rates. Economic Quarterly, 91, 1–21.Google Scholar
  8. Montrucchio, L., & Uberti, M. (2001). Quadratic dynamic programming. In Proceedings of the workshop MDEF2000 (Dynamical Models for Economics and Finance), Urbino. Retrieved from http://www.econ.uniurb.it/bischi/MDEF2000.htm.
  9. Rosser, J. B., Jr. (1999). On the complexities of complex economic dynamics. Journal of Economic Perspectives, 13, 169–192.CrossRefGoogle Scholar
  10. Rosser, J. B., Jr. (2000). From catastrophe to chaos: A general theory of economic discontinuities. Boston: Kluwer.Google Scholar
  11. Stiglitz, J., & Greenwald, B. (2003). Towards a new paradigm in monetary economics. Cambridge: Cambridge University Press.Google Scholar
  12. Stiglitz, J., & Weiss, A. (1981). Credit rationing in markets with imperfect information. American Economic Review, 71, 393–410.Google Scholar
  13. Svensson, L. (1997). Inflation forecast targeting: Implementing and monitoring inflation targets. European Economic Review, 41, 1111–1146.CrossRefGoogle Scholar
  14. Taylor, J. B. (1993). Discretion versus policy rules in practice. Carnegie-Rochester Conference Series on Public Policy, 39, 195–214.CrossRefGoogle Scholar

Copyright information

© Springer-Verlag Berlin Heidelberg 2010

Authors and Affiliations

  1. 1.Dipartimento di Statistica e Matematica ApplicataUniversità degli Studi di TorinoTorinoItaly

Personalised recommendations