The optimal monetary instrument for prudential purposes |
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| Authors: | C.A.E. Goodhart P. Sunirand D.P. Tsomocos |
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| Affiliation: | a Financial Markets Group, London School of Economics, United Kingdom;b Saïd Business School and St. Edmund Hall, University of Oxford, United Kingdom |
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| Abstract: | ![]()
The purpose of this paper is to assess the choice between adopting a monetary base or an interest rate setting instrument to maintain financial stability. Our results suggest that the interest rate instrument is preferable, since during times of a panic or financial crisis the Central Bank automatically satisfies the increased demand for money. Thus, it prevents sharp losses in asset values and enhanced asset volatility. |
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| Keywords: | Interest rates Monetary base Bank capital Financial stability Monetary policy |
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