publication . Preprint . 2011

Incorporating Financial Stability in Inflation Targeting Frameworks

Burcu Aydin; Engin Volkan;
Open Access
  • Published: 01 Sep 2011
The global financial crisis has exposed the limitations of a conventional inflation targeting (IT) framework in insulating an economy from shocks, and demonstrated that its rigid application may aggravate the effect of shocks on output and inflation. Accordingly, we investigate possible refinements to the IT framework by incorporating financial stability considerations. We propose a small open economy DSGE model, calibrated for Korea during the period of 2003 - 07, with real and financial frictions. The findings indicate that incorporating financial stability considerations can help smooth business cycle fluctuations more effectively than a conventional IT frame...
free text keywords: General (includes Measurement and Data), Financial Markets and the Macroeconomy, Monetary Policy, Central Banking, and the Supply of Money and Credit: General, [Financial stability;Monetary policy;DSGE, financial accelerator, inflation, central bank, monetary shock, Prices, Business Fluctuations, and Cycles]
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