Journal
JOURNAL OF MONETARY ECONOMICS
Volume 59, Issue 5, Pages 449-465Publisher
ELSEVIER
DOI: 10.1016/j.jmoneco.2012.05.006
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Funding
- Divn Of Social and Economic Sciences
- Direct For Social, Behav & Economic Scie [0820117] Funding Source: National Science Foundation
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Monetary policy may play a substantial role in mitigating the effects of financial crises. In this paper, I suppose that the economy occasionally but infrequently experiences crises, where financial variables affect the broader economy. I analyze optimal monetary policy under such financial uncertainty, where policymakers recognize the possibility of crises. Optimal monetary policy is affected during the crisis and in normal times, as policymakers guard against the possibility of crises. In the estimated model this effect is quite small. Optimal policy does change substantially during a crisis, but uncertainty about crises has relatively little effect. (C) 2012 Elsevier B.V. All rights reserved.
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