Abstract
The monetary transmission is one of the most studied fields of monetary economics from both a theoretical and an empirical perspective. Understanding how monetary impulses are translated into changes in aggregate expenditures is of essential importance for the evaluation of the monetary policy stance. Monetary policy must be conducted with an accurate assessment of the timing and effect of policy changes on prices and quantities on an aggregate level (Mishkin, 1995). The evolution and identification of the multiple channels of monetary transmission at work has changed with the emergence of varying conceptional frameworks which have been applied to analyze monetary policy. For instance, the early debate on the propagation effects between Keynesian and Monetarist models has been dominated with the question on how changes in the money supply affect the yields of a (imperfectly substitutable) set of assets. Whereas in the simpleIS-LM model the relevant distinction was based on money and a “representative” long-term bond, the monetarist approach highlighted the importance of wealth and substitution effects between various domestic and foreign assets, which are affected by changes in the money supply and have induced changes in investment and consumption paths.By the same token, the recognition that the central bank uses the short-term interest rate as the operating instrument for achieving its policy goals may alter the logic of monetary transmission compared to the older view according to which money supply was treated as exogenous and viewed as under the control of the monetary authority. With an interest-rate setting monetary policy, the stock of money adjusts endogenously and arises from the private sector’s money demand and the bank’s willingness to provide loans (Meyer, 2001).
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Notes
- 1.
See, for example, Hicks (1937), Friedman (1959) or Meltzer (1995).
- 2.
In the following, it is abstracted from the exchange rate channel. It belongs to the “money view” where a reduction in domestic interest rates generally lowers the return of domestic assets relative to foreign assets; it triggers a currency depreciation and makes domestic goods cheaper than foreign goods. The effect on aggregate demand comes through an increase in net exports.
- 3.
Tobin’s q theory can be linked to the neoclassical concept of the user cost of capital; indeed, Hayashi (1982) shows that both investment theories are identical.
- 4.
Lifetime resources are made up of financial, real and human capital.
- 5.
See, for example, Boivin et al. (2008) and Boivin et al. (2009).
- 6.
Monitoring costs on part of lenders are typically incurred on the borrower’s repayment schedule so that the latter does not has an incentive to understate the project outcomes. In order to reduce these monitoring costs, Townsend (1979) shows that it is optimal to monitor if the borrower reports a default in order to verify the state. In this respect, it could even be possible that borrowers ration credit if lenders find it unprofitable to attract borrowers with riskier projects despite the possibility of increasing the loan rate (Stiglitz and Weiss, 1981).
- 7.
See Kiyotaki and Moore (1997), Carlstrom and Fuerst (1997), Holmström and Tirole (1997) or Bernanke et al. (1999). Most recently, different variants of balance sheet channels have been discussed from the perspective of simple monetary rules and optimal monetary policy (Cúrdia and Woodford, 2008; Fiore and Tristani, 2009).
- 8.
In this respect, Disyatat (2010a, 9) remarks that “while traditional [bank lending] models assume that a monetary tightening leads to a shortage of liquidity for banks, the presumption here is that it leads to a disproportionate rise in the price of funding liquidity.”
- 9.
This pattern has been laid out by Bernanke and Blinder (1988), Kashyap and Stein (2000) or Diamond and Rajan (2006). Banks should also be able to sell assets in order to adjust the balance sheet. Although relative liquid banks can withdraw liquid asset to protect their loan portfolios, this strategy is not possible for less liquid and small financial institutions.
- 10.
See ECB (2008b) for an overview of the motives and forms of securitization.
- 11.
Short reviews of the risk-taking channel can be found in ECB (2008a, 2009a); Gambacorta (2009).
- 12.
See Minsky (1975, 1982, 2004). Fisher’s debt deflation and Kindleberger’s description of booms and busts fit neatly into Minsky’s description of the importance of the financial structure for economic activity (Fisher, 1933; Kindleberger, 1995).
- 13.
The term “hedge-financed” is used differently compared to the more modern view of the management of risky hedge funds. Here, Minsky (1982) refers to the cash flow position of borrowers: they can meet cash flow commitments (loan rate and redemption payments) out of current business cash flow streams.
- 14.
Minsky (2008, 211) emphasis that “[w]ith such a rate pattern, one can make on the carry by financing positions in capital assets by long- and short-term debts, and positions in long-term financial assets by short-term, presumably liquid, debts.”
- 15.
For a market equilibrium to hold, the tangency portfolio must coincide with the market portfolio of all risky assets. This is the assumption made by the Capital Asset Pricing model (CAPM).
- 16.
See Epstein and Zin (1991) and Campbell and Cochrane (1999).
- 17.
See, for example, Lyrio et al. (2006), Wachter (2006), Piazzesi and Schneider (2006), Rudebusch and Swanson (2008a), Rudebusch and Swanson (2008b).
- 18.
Asset pricing models rely on assumptions about investor preferences. The vast majority of models apply the von Neumann/Morgenstern approach of describing expected utility. A gamble is merged with pre-existing bets to evaluate whether it represents a worthwhile addition to total wealth. Narrow framing is different because it describes the tendency to treat single gambles separately from other gambles that determine total wealth. Utility is derived directly from the gamble and not indirectly via ist contribution to total wealth (Barberis and Thaler, 2003).
- 19.
Bernanke and Kuttner (2005) find that stock markets’ reaction to monetary policy surprises comes from the effects of policy rate changes on expected excess returns. They argue that monetary policy shocks and the equity risk premium are related through the (perceived) riskiness of stocks or on investors’ risk aversion. Furthermore, Kurov (2010) points out that the stock market reaction to monetary policy surprises is asymmetric depending on investor sentiment and overall market conditions (bull vs. bear market).
- 20.
From a regulatory perspective, risk management rules prior to the financial crisis of 2007 (Basel II) to shield the financial system are counterproductive since they actually expedite endogenous risk and promote higher procyclicality. Bank capital requirements for the purpose of cushioning the underlying VaR are relaxed in periods of booms and low perceptions of risk (Brunnermeier et al., 2009).
- 21.
The following comments rely heavily on Adrian and Shin (2008b, 2009a,b,c).
- 22.
It is usually assumed that a bank aims to adjust its balance sheet so that its economic equity meets total VaR. It can be justified from an optimal contracting problem and from empirical observation (Shin, 2008).
- 23.
Alternatively, leverage constraints can be determined through regulatory capital requirements.
- 24.
Leverage most generally is defined as the ratio of total assets to equity. The haircut in secured lending is defined as the percentage amount of equity (cash) a borrower has to bring in order to finance total assets; it is the ratio of equity to total assets.
- 25.
Data are taken from Datastream, ECB, Fed and Merrill Lynch. Corporate bond spreads are defined as the difference between corporate bond rates paid by BBB- and AAA-rated corporate institutions; they are measured in basis points. Lending Standards are specified as the net percentage of banks contributing to tightening standards to large and medium firms in the US and to all firms in the euro area. Expected Default Probabilities are due to the Fitch PRBY Default Index with a maturity of 5 years. Default rates are calculated by dividing the volume of defaulted bonds by the average principal volume outstanding for the time period under observation; the index is measured in basis points. The measure of implied volatility is derived from the Chicago Board of Trade Generic 1st TY future for the US and from the Eurex Generix 1st RX future for the euro area.
- 26.
It should be noted, however, that in principle fluctuations in yield spreads can either be due to an increased risk appetite (market prices of risk) or due to a fall in underlying actual credit risk (with given market prices of risk). Following Bundesbank (2005b), it can be mostly assumed that in general, time-varying yield spreads are to some extent the expression of changing risk attitudes.
- 27.
In addition, Bundesbank (2005a) conducts a VAR analysis; it shows that an increase in the 3-month Euribor rate is followed by an increase in corporate spreads where lower-rated firms’ interest-rate costs react more sensitive and stronger to short-rate interest rate changes.
- 28.
A principal component analysis reveals that the first principle component accounts for almost 84% in the US and for 87% in the euro area of the comovements of selected variables in Fig. 7.2.
- 29.
See Jiménez et al. (2009), Ioannidou et al. (2009), Altunbas et al. (2009a), Manganelli and Wolswijk (2009), Altunbas et al. (2010), Maddaloni and Peydro (2010).
- 30.
The data set is pulled from the Board of Governors, flows of funds and from the Bundesbank, banking statistics.
- 31.
The term spread is measured as the difference between the 3-month interest rate and the 10-year government bond yield. The sample period for the US is from 1982:1–2009:4 and for the euro area from 1999:1–2010:1.
- 32.
The data before 1953 are taken from the NBER Macro History Database; the short term interest rate is a 3-month commercial paper rate traded in New York and the long-term interest rate represents US yields on railroad bonds up to 1919 and US yields on long-term governments bonds since then. From 1953 on, data are provided by the Federal Reserve Board.
- 33.
Historical price levels are for instance provided by Robert J. Shiller on his webpage www.econ.yale.edu/shiller.
- 34.
The evolution of modern central banking and the switch to interest-rate policy is summarized in Spahn (2001a) or Meltzer (2005).
- 35.
Carroll (2009) makes the same point by using one-month interbanking rates for the sample period. With these rates, the reduced volatility in the short-term interest rate is even more obvious.
- 36.
In referring to common business practices of using the maturity mismatch, Cochrane (2008b) remarks that “a pre-1932 hedge fund would sell long-term debt and buy commercial paper”. Moreover, he shows that even under an anchored inflation regime with a constant expected inflation, the variance of the real value of a nominal bond is much more sensitive to the variance of inflation than the one of a nominal bond in a regime in which the expected price level is constant.
- 37.
If a central bank announces that it will tighten policy at a “measured pace”, this coding will not only hint to the expected future policy path, but it may also contribute to lower interest-rate risk priced in long-term bonds.
- 38.
This perspective is central in the debate how to implement lender of last resort policies in order to guarantee the functioning of money markets. The changing views on the lender of last resort in the history of monetary economics are summarized in Knittel et al. (2006).
- 39.
There is an analogy to the benefits and costs of deposit insurance. Due to maturity and liquidity transformation, any deposit-taking intermediary is intrinsically exposed to funding liquidity risk. A situation can arise that induces (patient) depositors to withdraw their funds early when they expect other depositors to withdraw. A bank run occurs with forced liquidation of the intermediarie’s assets. With deposit insurance, (patient) depositors do not initiate bank runs because they expect deposits to be safe (Diamond and Dybvig, 1983). However, with deposit insurance, a bank has an incentive to become as risky and large as possible to maximize expected returns and failures absorbed by taxpayers occur with a positive probability (Kareken and Wallace, 1978).
- 40.
A detailed derivation of the model equations is provided in Appendix E.
- 41.
The terminologies cost-push shock, supply shock or inflation shock are used simultaneously in this Section.
- 42.
This holds under the assumption that potential output is normalized to zero and the output-gap target is also zero.
- 43.
The baseline model abstracts from aggregate demand components like investment, exports or government purchases so that the goods market clearing condition is simply given by Yt = Ct.
- 44.
The derivation of the one-period short rate actually follows the same method as in the standard optimal policy literature (Woodford, 2003; Evans and Honkapohja, 2006). Here, rational expectations of inflation and output are inserted in the aggregate demand function and solved for the interest rate. The only difference is that the specification above accepts the finance view of log-normal returns so that interest rates are augmented by Jensen’s inequality.
- 45.
Evans and Honkapohja (2006) find that such an interest-rate characterization is not determinate under specific parameter constellation and not learnable for all structural parameter values. Instead, they propose an expectations-based reaction function where the central bank does not substitute out for what the expectations ought to be. On similar grounds, Cochrane (2007a) discusses determinacy properties of New-Keynesian models and makes us aware of the fact that the logic within the models are the opposite to the more “old”-Keynesian models. The marginal utility approach of macroeconomic modeling reveals that high inflation goes along with low output growth and high real interest rates coincides with high output growth; consequently, the propagation channels are different compared to Keynesian models as in Svensson (1997).
- 46.
Sauer (2007) shows that δ is always 0 < δ < 1 in order to have stability and to fulfill the MSV criterion.
- 47.
In order to avoid confusion, the expected two-period return is defined as Etrr2, t + 1 = p1, t + 1 − p2, t = − rt + 2rt.
- 48.
The Jensen inequality term is excluded from the risk premium computation.
- 49.
The parameter values are chosen as β = 0. 99, α = 0. 17, ω = (. 5 ∕ 4)2 = 0. 0156, ρ = 0. 8 and γ = 4. See McCallum and Nelson (2004b) and Gali (2008).
- 50.
They are calculated by setting the risk price vector equal to zero and by subtracting Jensen’s inequality to get a measure for risk-neutral yields. The yield term premium is then defined as the difference between actual yields and risk-neutral yields.
- 51.
Notice, that preference shocks can be interpreted as demand shocks since they show up in the natural rate specification. Shocks to the natural rate are compressed in an exogenous demand shock vector (Gali, 2008).
- 52.
Alternatively, excess returns are greater than zero if the conditional covariance between the pricing kernel and (1) the future expected sequence of pricing kernels is negative or (2) the future bond prices is negative.
- 53.
For an empirical overview of the coincidence of low nominal short-term interest rates and rising asset prices for OECD countries see Ahrend et al. (2008).
- 54.
The nominal short rate is the 3-month interest rates and inflation is the CPI all items index. Data are pulled from FED Fred and the ECB.
- 55.
For the calculation, headline inflation (CPI index all items) has been used. The output gap is measured as the percentage deviation of actual real GDP from potential real GDP. The short rate is the 3-month interest rate. Data sources: Fed Fred, ECB and OECD.
- 56.
For a discussion about the use of different price indices see Mishkin (2007).
- 57.
For the US, the core PCE inflation rates is taken as benchmark for core inflation and for the euro area, the HCPI less energy and food components serves as proxy for core inflation.
- 58.
Average real rates and average growth in potential output are from 1980:1–2009:4 in the US and from 1999:1–2009:4 in the euro area. The generated time series broadly matches natural rate dynamics which are estimated within structural models such as those of Belke and Klose (2010).
- 59.
Other inflation measures such as the CPI likewise stabilized around the same level. Only the core PCI index fell in the beginning of 2003 from 2% to 1.4%, but recovered at 1.9% in the end of 2003.
- 60.
Moreover, is is questionable to assume a 2% inflation target for core inflation. This would bring about much larger and more volatile dynamics in headline inflation (Mishkin, 2007).
- 61.
Following DeBandt and Hartmann (2002), a financial shock that affects the whole economy is labeled as “systematic” since it is not diversifiable. This shock may produce a “systemic” event in financial markets where simultaneously a large number of financial institutions are hit by the shock (e.g. a macro shock). Systemic events can also be the result of limited or even idiosyncratic shocks to one or a small number of institutions which spread out via contagion (domino effects, loss and liquidity spirals. Finally, systemic events are more likely to appear when stronger imbalances have built up over time and then unravel abruptly.
- 62.
For instance, Caballero and Krishnamurthy (2008) find that the process of increased intermediation chains make the financial system too complex. Agents are not capable of detecting all the correlations in order to optimally diversify portfolios. In such an environment, disruptions trigger panic and fundamental uncertainty. This uncertainty is heavily pronounced for untested financial innovations that lead agents to question their worldview.
- 63.
Such funding activity is closely related to the emergence of the wholesale interbanking markets across industrialized countries. The first experiences with wholesale funding on an international level took place in the late 1960s with the fast growing euro-dollar market. Traditional banking relies on the available stock of retail deposits for funding liquidity whose size was only partially or not at all in the bankers’ control. The flexibility of extending or contracting loan activity mainly originated from the stock of liquid asset (government securities). With a deep wholesale market, holding of liquid buffers became inefficient from an institution’s point of view so that marginal funding took place in the interbanking market. Asset market liquidity had been replaced by funding liquidity for the margin of freedom of additional credit granting (Goodhart, 2010).
- 64.
In order to fulfill their capital constraints, banks can either sell assets or they can raise new capital. According to Myers (1977) and Kashyap et al. (2010), the “debt overhang” problems makes banks reluctant to raise new capital because new capital would be immediately siphoned off by the more senior creditors. Therefore, in the shareholders’ interest, banks shrink assets with the social costs of liquidity dry-ups and credit crunches rather to raise new capital that would not produce such negative welfare effects.
- 65.
Brunnermeier (2009) notices that in the run-up to the financial crisis of 2007, investment banks had to re-finance one-quarter of total assets via overnight repo contracts. Historical support for the three criteria, size, leverage and maturity mismatch can be found in Schularick and Taylor (2009).
- 66.
The story of the interest-rate conundrum of 2004–2005 then can be regarded from a different perspective. Whereas the common view suggests that the restrictive fed funds cycle did not became effective since long-term interest rates did not pick up, the alternative view would claim that monetary policy was effective working through the financial sector and triggering a decline in credit growth (Adrian et al., 2010a).
- 67.
Along similar lines, the instability of the money-income relationship (money demand function) has been one of the motives of central banks for abandoning monetary targeting and downgrading money as an information variable for predicting future inflation (Friedman, 1988). To what extent money can be still used as information variable mainly depends on improvements in statistical methods and refinements of money-demand equations (Fischer et al., 2006; Assenmacher-Wesche and Gerlach, 2006).
- 68.
MFIs incorporate credit institutions, money market funds, and other financial deposit-taking institutions. OFIs come closest to the concept of “shadow banks” with securitization vehicles and dealers belonging to the latter group. For an analysis of the OFI sector see ECB (2010c).
- 69.
Indeed, ECB (2008b) reports that the amount of true-sale securitization corresponds to MFIs debt security purchases issued by OFIs.
- 70.
For a historical record, see Schularick and Taylor (2009); Reinhart and Rogoff (2009).
- 71.
In 1979, the term “macroprudential” was first used by the chairman of the Basel Committee on Banking Supervision. He said that “micro-economic problems (which were of concern to the Committee) began to merge into macro-economic problems (which were not) at the point where micro-prudential problems became what could be called macro-prudential ones. The Committee had a justifiable concern with macro-prudential problems and it was the link between those and macro-economic ones which formed the boundary of the Committee’s interest”, cited from Clement (2010, 60).
- 72.
ECB (2010a) generalizes four approaches how to identify and asses systemic risk and financial imbalances: (1) coincident models for identification of the current state of financial stability, (2) early-warning models, (3) macro stress-testing models and (4) contagion and spillover models.
- 73.
See Borio and Lowe (2004), Borio and Drehmann (2009), Alessi and Detken (2009), Gerdesmeier et al. (2009), ECB (2010b). The term “unusual” is typically related to some measures of equilibrium levels. The latter can be estimated with the help of structural economic and statistical models or through the calculation of long-term averages. In this respect, joint indicators based on credit, equity and property information perform best and the inclusion of a global perspective in terms of these indicators improve on the prediction power and on the reduction of false alarms.
- 74.
Adrian and Brunnermeier (2009) construct a CoVari variable which is calculated as the VaR of the whole financial sector conditional on institution i being in distress. ΔCoVari denotes the difference between CoVari and financial sector VaR; whereas ΔCoVarij displays the increase in risk of institution i conditional on risk on institution j.
- 75.
Gersbach and Hahn (2010) propose a systematic, rule-based aggregate equity ratio of the banking sector that is related to to the current state of money and credit.
- 76.
Most interestingly, the discussion on the benefits and costs of deposit insurance culminated in the conclusion that intermediaries must hold much more capital to protect against risky activities (Kareken and Wallace, 1978). The discussion took place in the late 1970s and early 1980s (!) when capital ratios were yet significantly higher than before the financial crisis of 2007 (Goodhart (2010) reports on the historical evolution of capital ratios in the US).
- 77.
The terminology is due to Bean et al. (2010).
- 78.
For instance, prior to the financial crisis in 2007, European banks were subject to risk-weighted capital requirements but not to a cap on leverage. Consequently, banks increased leverage by adding alleged “highly rated” asset-backed securities which did not contribute to an increase in risk-weighted assets. On the contrary, US commercial banks were faced with a leverage ratio but not to capital requirements based on risk-weighted assets. Therefore, they filled up their portfolios with more risky securities (Goodhart, 2010).
- 79.
See for modeling results and literature reviews Bernanke and Gertler (1999), Bernanke and Gertler (2001), Cecchetti et al. (2000), Cecchetti et al. (2002), Filardo (2004), Posen (2006), Roubini (2006), Disyatat (2010b).
- 80.
For this perspective, see Bordo and Jeanne (2002), Borio and Lowe (2002), White (2006).
- 81.
Weber (2008, 3) notes that “[t]he debate about monetary policy and financial markets is too often slanted to the question on how to deal with asset price bubbles. […] In my opinion, the view of monetary policy and asset prices is too narrow. A more fruitful debate on appropriate monetary policy reactions to developments on financial markets would be possible if the focus were redirected from financial bubbles to the issue of procyclicality.”
- 82.
See for an overview and the effectiveness of unconventional monetary policy Cúrdia and Woodford (2009a), Cúrdia and Woodford (2010), Borio and Disyatat (2009), Gertler and Kioytaki (2010).
- 83.
For a theoretical derivation and a rule-based approach see McCulley and Toloui (2008), Taylor (2008b), Cúrdia and Woodford (2009b), Belke and Klose (2010), Giavazzi and Giovannini (2010).
- 84.
In a similar spirit, Diamond and Rajan (2009, 1) call for higher policy rates in order to fight imbalances: “To offset incentives for banks to make more illiquid loans, authorities may have to commit to raising rates when low, to counter the distortions created by lowering them when high.”
- 85.
See Brunnermeier (2008) on the literature on bubble models emerging from rational or behavioral agents and from limits to arbitrage; or to put it in Keynes’ words: “Markets can remain irrational longer than you can remain solvent,” cited from Lowenstein (2000, 123).
- 86.
See Borio and Lowe (2004), Borio and Drehmann (2009), Alessi and Detken (2009), Gerdesmeier et al. (2009), Hatzius et al. (2010), ECB (2010b).
- 87.
This holds particularly for the concept of the output gap which can be only measured with strong noise.
- 88.
This rationale of flattening the yield curve stands in contrast to the findings of Chap. 6.2.1. Whereas in the former Chapter, the focus is on the demand side of credit with the expectational effects of monetary policy, this Section emphasizes the supply side of credit and the bank-lending as well as the risk-taking channel of monetary policy transmission.
- 89.
Giavazzi and Giovannini (2010) model such a low rate equilibrium and point out that the ex-ante real rate might be too low in “normal” times. White (2009) describes this low-rate trap scenario with the help of macroeconomic performance in the US following the stock market crash in 1987, in the early 1990s, in the early 2000s and currently, in the aftermath of the financial crisis that began in 2007. Indeed, there is a clear trend decline in the policy rate with massive pre-emptive easing in the run-up to financial crisis. After each crisis, the policy rate did not return to its old level.
- 90.
Applying the Tinbergen principle in this context and calling for two policy instruments, is not convincingly valid. Like for the standard inflation targeting approach, the solution to a problem with one instrument and multiple targets can be derived in terms of the intended trajectory for any one arbitrarily chosen target. This can hold for the intra-temporal inflation/output trade-off but for the inter-temporal price stability/future financial stability trade-off, too. In any way, the independence of the different objectives depends on the time horizon within monetary policy is supposed to operate.
- 91.
Reserves over and above some outright reserve requirements (excess reserves) are hold primarily as a buffer against unexpected payment shocks and due to institutional characteristics.
- 92.
For a graphical representation of the various forms of implementing monetary policy the reader is referred to Keister et al. (2008), Spahn (2010). The authors also discuss shortcomings of organizing the money market as a floor system. Among other arguments, the loss of information on the state of the money market, as well as the requirement to hold a large stock of public (and private) securities may be regarded as disadvantage.
- 93.
See Adrian et al. (2010a) on the empirical dominance of the supply effect over the demand effect.
- 94.
The concept of collateral management is similar to the idea of imposing asset-based reserve requirements (ABBR) where required reserves are held against assets rather than against deposits (Palley, 2004, 2007). Along the same lines, ABBR change the banking’s asset structure by imposing additional costs on selected assets. The same mechanism holds for imposing capital requirements that increase with the growth of credit collateralized by assets whose prices have unsustainable soared (Schwartz, 2003). It has also been argued that regional differing collateral management within the euro area is an effective tool to address imbalances and heterogeneity across member countries (Geiger and Spahn, 2007; Brunnermeier, 2010).
- 95.
It is clear that even under the floor system there arise an inverse relationship between the market rate and the supply of reserves in case the latter is cut back significantly and money demand is not fully allotted.
- 96.
Many central banks publish financial stability reports on a regular basis; among them are the European Central Bank, Bank of England, Sveriges Riksbank, Bank of Canada or the Bank of Japan.
- 97.
For instance, the ECB comments in its June (2005, 9) Financial Stability Review: “On the one hand, there has been a broad-based improvement in the capacity of the financial system to absorb adverse disturbances. On the other, financial imbalances are already quite large and could expand further, primarily at the global, but also at the domestic, level.”
- 98.
Typically, optimal monetary policy is evaluated in a linear-quadratic framework in which the magnitude and the direction of macroeconomic risk does not matter; this is so because certainty equivalence holds in these models among them those of Clarida et al. (1999), Giannoni and Woodford (2003b), Svensson and Woodford (2005).
- 99.
In this respect, Kindleberger (1995, 35) remarks that “[w]hen speculation threatens substantial rises in asset prices, with a possible collapse later, and harm to the financial system […], monetary authorities confront a dilemma calling for judgement, not cookbook rules of the game.”
- 100.
As a representative see Mishkin (2008, 2010).
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
Copyright information
© 2011 Springer-Verlag Berlin Heidelberg
About this chapter
Cite this chapter
Geiger, F. (2011). Financial Risk and Boom-Bust Cycles. In: The Yield Curve and Financial Risk Premia. Lecture Notes in Economics and Mathematical Systems, vol 654. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-21575-9_7
Download citation
DOI: https://doi.org/10.1007/978-3-642-21575-9_7
Published:
Publisher Name: Springer, Berlin, Heidelberg
Print ISBN: 978-3-642-21574-2
Online ISBN: 978-3-642-21575-9
eBook Packages: Business and EconomicsEconomics and Finance (R0)