Optimal Monetary Policy Rule with Financial Factors
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| Title | Optimal Monetary Policy Rule with Financial Factors
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| Author | Ma Yong |
| Organization | School of Finance, China Financial Policy Research Center |
| Email | mayongmail@ruc.edu.cn |
| Key Words | Monetary Policy; Interest Rate Rule; Financial Stability; Economic Stability |
| Abstract | Based on a New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model with financial factors, this paper derives a micro-founded optimal interest rate rule with financial variables and analyzes its applications in China’s monetary policy practice. Our results show that the optimal interest rate rule reacts not only to the output gap and inflation but also to the key financial variables such as real exchange rate and financial cycle to maintain the stability of the currency and the financial system. In addition, our results also deliver two other interesting results: first, the optimal interest rate rule exhibits a clear forward-looking property, suggesting a need to strengthen expectations management; second, the direction of the optimal interest rate rule coincides with the government spending, suggesting that the monetary and fiscal policies need to be coordinated to avoid policy conflicts. |
| Serial Number | WP1214 |
| Time | 2017-08-08 |
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