(Un)anticipated monetary policy in a DSGE model with a shadow banking system

Fabio Verona; Manuel M. F. Martins; Inês Drumond

Motivated by the US events of the 2000s, we address whether a too low for too long interest rate policy may generate a boom-bust cycle. We simulate anticipated and unanticipated monetary policies in state-of-the-art DSGE models and in a model with bond financing via a shadow banking system, in which the bond spread is calibrated for normal and optimistic times. Our results suggest that the U.S. boom-bust was caused by the combination of (i) too low for too long interest rates, (ii) excessive optimism and (iii) a failure of agents to anticipate the extent of the abnormally favorable conditions.

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Year of publication:	2012
Authors:	Verona, Fabio ; Martins, Manuel Mota Freitas ; Drumond, Inês
Publisher:	Frankfurt am Main : Johann Wolfgang Goethe-Univ.
Subject:	DSGE model \| shadow banking system \| too low for too long \| boom-bust \| Zinspolitik \| Interest rate policy \| Akzelerator \| Accelerator \| Investmentbank \| Investment bank \| Dynamisches Gleichgewicht \| Dynamic equilibrium \| USA \| United States \| 1953-2011