The Taylor Rule and Financial Stability – A Literature Review with Application for the Eurozone

Käfer, Benjamin

doi:10.1515/roe-2014-0204

Cited by 25 publications

(24 citation statements)

References 62 publications

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“…Since the Australian mortgage market relies heavily on variable rate mortgages, variable mortgage loans are subject to high interest rate risk. Financial stability risk is infused as a result of changes to monetary policy (Käfer, 2014). Furthermore, as house prices are directly affected by interest rate shocks, the risk of housing bubbles occurring increases.…”

Section: Data Samplementioning

confidence: 99%

Is the Australian housing market in a bubble?

Wang

Koblyakova

Tiwari

et al. 2018

IJHMA

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Purpose This paper aims to explore principal drivers affecting prices in the Australian housing market, aiming to detect the presence of housing bubbles within it. The data set analyzed covers the past two decades, thereby including the period of the most recent housing boom between 2012 and 2015. Design/methodology/approach The paper describes the application of combined enhanced rigorous econometric frameworks, such as ordinary least square (OLS), Granger causality and the Vector Error Correction Model (VECM) framework, to provide an in-depth understanding of house price dynamics and bubbles in Australia. Findings The empirical results presented reveal that Australian house prices are driven primarily by four key factors: mortgage interest rates, consumer sentiment, the Australian S&P/ASX 200 stock market index and unemployment rates. It finds that these four key drivers have long-term equilibrium in relation to house prices, and any short-term disequilibrium always self-corrects over the long term because of economic forces. The existence of long-term equilibrium in the housing market suggests it is unlikely to be in a bubble (Diba and Grossman, 1988; Flood and Hodrick, 1986). Originality/value The foremost contribution of this paper is that it is the first rigorous study of housing bubbles in Australia at the national level. Additionally, the data set renders the study of particular interest because it incorporates an analysis of the most recent housing boom (2012-2015). The policy implications from the study arise from the discussion of how best to balance monetary policy, fiscal policy and macroeconomic policy to optimize the steady and stable growth of the Australian housing market, and from its reconsideration of affordability schemes and related policies designed to incentivize construction and the involvement of complementary industries associated with property.

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Section: Data Samplementioning

confidence: 99%

Is the Australian housing market in a bubble?

Wang

Koblyakova

Tiwari

et al. 2018

IJHMA

View full text Add to dashboard Cite

show abstract

“…These considerations necessarily raise the question whether the analysis framework usually used by central banks is the right instrument to derive scientific guidance for policy makers. Existing research in this field is yet still dominated by studies using DSGE models as underlying framework for the analysis [Käfer (2014); Chatelain and Ralf (2014); Plosser (2014)]. In this context, Mishkin (2011) states that the underlying linear quadratic framework of pre-crisis theory of optimal monetary policy has a significant shortcoming, i.e.…”

Section: Introductionmentioning

confidence: 99%

The interaction between monetary and macroprudential policy: should central banks ‘lean against the wind’ to foster macro-financial stability?

Krug

2018

Economics

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The extensive harm caused by the financial crisis raises the question of whether policymakers could have done more to prevent the build-up of financial imbalances. This paper aims to contribute to the field of regulatory impact assessment by taking up the revived debate on whether central banks should use the interest rate to directly respond to the build-up of financial sector imbalances, i.e. 'lean against the wind' or not. Currently, there is no consensus on whether monetary policy is, in general, able to support the resilience of the financial system or if this task should better be left to the macroprudential approach of financial regulation. The author aims to shed light on this issue by analyzing distinct policy regimes within an agent-based computational macro-model with endogenous money. He finds that policies that make use of their comparative advantage lead to superior outcomes concerning their respective intended objectives. In particular, he shows that 'leaning against the wind' should only serve as first line of defense in the absence of a prudential regulatory regime and that price stability does not necessarily mean financial stability. Moreover, macroprudential regulation as unburdened policy instrument is able to dampen the build-up of financial imbalances by restricting credit to the unsustainable high-leveraged part of the real economy.(Published in Special Issue Agent-based modelling and complexity economics) JEL E44 E50 G01 G28 C63

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“…Beckman and Wilde (2013) found that real exchange rates adjust and the mean reverts much faster in case of large deviations from equilibrium exchange rates. Kafer (2014) indicated that the Taylor rule should be augmented with exchange rates, asset prices, credit, and spreads. Coibion and Goldstein (2012) found that the Federal Reserve responds disproportionately in low unemployment states.…”

Section: Theoretical Aspectsmentioning

confidence: 99%

Taylor Rule During the Zero or Low Interest Rate Era: The Recent Japanese Case

Kurihara¹

2016

AEF

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The Taylor rule has been discussed a lot in theoretical and empirical studies. However, interest rates are quite low all over the world. Japan is no exception. Instead of traditional monetary policy based on interest rates, unconventional monetary policy based on money has been ongoing. This paper investigates whether the Taylor rule fits well in the recent Japanese case. With some other variables added to the Taylor rule along with price gap and output gap, the augmented Taylor rule is examined empirically. The empirical results show that the traditional Taylor rule is more appropriate than most augmented ones; however, exchange rate should be taken into account in determining monetary policy. Moreover, a more aggressive monetary policy from the latter part of the 2000s is needed.

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The Taylor Rule and Financial Stability – A Literature Review with Application for the Eurozone

Cited by 25 publications

References 62 publications

Is the Australian housing market in a bubble?

Is the Australian housing market in a bubble?

The interaction between monetary and macroprudential policy: should central banks ‘lean against the wind’ to foster macro-financial stability?

Taylor Rule During the Zero or Low Interest Rate Era: The Recent Japanese Case

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