2009 This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. This paper discusses the use of interest rates as the operating target for monetary policy in Tunisia and the roadmap for establishing the other building blocks of an inflation targeting framework. It argues that strengthening the effectiveness of the current monetary policy framework will facilitate the adoption of inflation targeting over time. JEL Classification Numbers:
This paper has three purposes. First, we discuss under which conditions a Central Bank sould include financial asset prices in its objectives'function and how this affects the optimal monetary policy in a rational expectations forward-looking model. Second, we show that the volatility of the policy instrument (i.e. nominal interest rate) is modified compared to the case where financial asset prices do not appear in the monetary policy loss function. We find that the volatility of nominal interest rate is lower in the first case when the economy faces demand shocks contrary to supply and financial shocks. In both cases, the reaction of monetary policy instruments to several shocks in the economy is depending on the sensibility of aggregate demand to real stock prices. Third, we show that the shape of the nominal-interest rate response to shocks depends on the weights given to inflation targeting and financial stability's goal.
This paper is a follow-up to the recommendations made by Jacques Drèze, Edmond Malinvaud and colleagues in 1993 (Drèze, Malinvaud et al., 1994). The key arguments that are of interest for discussion here are paraphrased below: 'For almost 20 years now, West European unemployment has been a major social problem and the sign of a significant underutilisation of resources at a time of substantial unfilled needs. The crux of the matter is a situation of inadequate aggregate demand, at a time when there does not seem to exist any leeway for fiscal expansion. The way out of this dilemma has been correctly identified by the European Commission, namely to find ways of stimulating investment without falling back too much on national budgets for funding. The emphasis on social and public investment is natural at a time when unused capacities limit the immediate prospects for business investment (which, moreover, would be labour saving).
NOTE: This Working Paper should not be reported as representing the views of the European Central Bank (ECB). The views expressed are those of the authors and do not necessarily reflect those of the ECB. Acknowledgements This article was prepared for a special issue of the Journal of Common Market Studies entitled: “Symposium on Economic and Monetary Union and the Crisis of the Euro Area ” to be published in volume 50, number 6. We would like to thank Philippe Moutot, Amy Verdun, Nicola Doyle and two anonymous referees for helpful comments and suggestions. Thanks are also due to Piet Philip Christiansen for research assistance and to Giovanna de Salvo and Silvia Geise for editorial assistance. We remain responsible for any errors or omissions. The views expressed are our own and do not necessarily reflect those of the ECB. The article reflects data and developments up to mid 2012.
This paper discusses the implementation of monetary policy during the economic and financial crisis of 2007-10. After summarising the different measures adopted by the ECB during these turbulent times, we present a stylised theoretical model that allows us to focus on the main trade-offs faced in implementing monetary policy. We argue that it is the level of key policy interest rates and the width of the interest rate corridor set by the standing facilities, and not the quantity of liquidity that is provided to the market, that are key to sustaining (some) private intermediation in the money market in the presence of increasing credit and liquidity risk. The model highlights the trade-offs faced by central banks when deciding on the degree and timing of its interventions. The main implications of the theory are supported by the empirical evidence. 1