Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5101016 | Journal of International Financial Markets, Institutions and Money | 2016 | 18 Pages |
â¢In a model of banking we give money a role in providing cheap collateral.â¢Monetary policy is still effective at the zero bound.â¢A simple rule for making M0 respond to credit conditions stabilises the economy.â¢Combination this with Price-level or GDP targeting, stabilises the economy further.â¢Aggressive and distortionary regulation of banks' balance sheets is redundant.
In a model of banking we give money a role in providing cheap collateral; i.e. besides the Taylor Rule, monetary policy can affect the risk-premium by varying the supply of M0 in open market operations, so that even at the zero bound monetary policy is still effective, and fiscal policy still crowds out investment. A simple rule for making M0 respond to credit conditions can substantially enhance the economy's stability. This, in combination with Price-level or nominal GDP targeting rules for interest rates, stabilises the economy further, making aggressive and distortionary regulation of banks' balance sheets redundant.