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Monetary policy, financial stability and interest rate rules

Author

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  • Di Giorgio, Giorgio
  • Rotondi, Zeno

Abstract

This paper investigates the empirical properties of simple interest rate rules that embed either ‘backward’ or ‘forward’ interest rate smoothing. Such interest rate rules can be rationalised as the operative reaction functions used by central banks pursuing monetary policy and financial stability targets. This paper considers the implications of banks’ risk management practices for monetary policy and derives interest rate rules by modelling the desire of the central bank to stabilise different definitions of the ‘basis’ risk as a contribution to financial stability.

Suggested Citation

  • Di Giorgio, Giorgio & Rotondi, Zeno, 2011. "Monetary policy, financial stability and interest rate rules," Journal of Risk Management in Financial Institutions, Henry Stewart Publications, vol. 4(3), pages 229-242, June.
    • Handle: RePEc:aza:rmfi00:y:2011:v:4:i:3:p:229-242
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    More about this item

    Keywords

    central banking; interest rate rules; monetary policy; financial stability; asset prices; futures market; hedging; basis risk; Federal Reserve; E44; E52; E58; G12; G13;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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