An exploration into new monetary policy

Abstract

An exploration into new monetary policy It is possible to design a monetary policy framework that focuses both on financial stability and price stability. In this article we first discuss how one can redesign the (classical) inflation targeting regime to take financial stability into consideration as well. In the model developed, monetary authority has only one policy tool-policy rate. Second, the possibility of having more than one policy tool is analyzed. The need for using macro prudential policy tools in addition to policy rate for monetary policy purposes poses an important problem: how should institutions responsible from monetary policy and financial stability co-ordinate? We briefly discuss what type of institutional set-ups can be designed to solve this co-ordination problem.