N. Korzhenevskii, National Research University Higher School of Economics, 20 Myasnitskaya Str., Moscow, 101000, Russian Federation (email@example.com).
The paper argues that financial system stability has become a target variable for the Federal Reserve System, European Central Bank and the Bank of England, and monetary policy since at least 2008 has been largely driven by its consideration. The author develops a simple formal model quantifying a central bank’s typical response to a change in general volatility levels showing that this has been a statistically stable relationship, even well before the subprime crisis in the USA. The relationship can be used by practitioners in order to determine the timing or conditions appropriate to expect a policy change given central bank’s behavioristic pattern. The use of unconventional measures is considered for the post-crisis period, with short-term rate expectations brought to the forefront. Quantitative easing is perceived as one of two main tools to anchor rate expectations. It is assumed that in all cases monetary policy has been successful in achieving its immediate targets so far, and market-observed rate expectations can be deemed acceptable to achieve primary policy goals.
unconventional monetary policy, central banks, volatility, rate expectations, quantitative easing, hidden function, policy rule
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