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The Taylor Rule and Financial Derivatives: The Case of Options

In: Advances in Monetary Policy and Macroeconomics

Author

Listed:
  • Chiara Oldani

Abstract

Modern macroeconomics considers the role of financial assets when modelling the behaviour of agents, policy implementing and transmission mechanisms. Financial innovation emerges in markets and exploits new opportunities, giving rise to (new) profits. The most significant financial innovations of the last thirty years have been in the area of derivatives (futures, options, swaps and forwards). The amount of derivatives trading is steadily growing on both exchange traded (ET) markets and OTC, and it is this growth that accounts for the present interest in these areas. According to BIS data, the ratio between the notional amount outstanding of derivatives (exchange traded and OTC) and world GDP was equal to 3.73 in 2001 and to 6.68 in 2004. Options are by far the most common derivatives contracts in ET markets. The role of derivatives in asset pricing is widely known and accepted. Here I shall start from their economic functions (leverage, substitutability, hedging) (Savona, 2003) in order to conduct further macroeconomic analysis.

Suggested Citation

  • Chiara Oldani, 2007. "The Taylor Rule and Financial Derivatives: The Case of Options," Palgrave Macmillan Books, in: Philip Arestis & Gennaro Zezza (ed.), Advances in Monetary Policy and Macroeconomics, chapter 4, pages 50-65, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-0-230-80076-2_4
    DOI: 10.1057/9780230800762_4
    as

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