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The Optimal Monetary Instrument for Prudential Purposes

Abstract:
The purpose of this paper is to assess the choice between adopting a monetary base or an interest rate setting instrument to maintain financial stability. Our results suggest that the interest rate instrument is preferable, since during times of a panic or financial crisis the Central Bank automatically satisfies the increased demand for money. Thus, it prevents sharp losses in asset values and enhanced asset volatility.

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Dimitrios Tsomocos More by this author
Charles Goodhart More by this author
Pojanart Sunirand More by this author
Publication date:
2011-06-05
URN:
uuid:70cf2d31-4619-4355-985e-1717de63bfe9
Local pid:
oai:eureka.sbs.ox.ac.uk:1848

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