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Title: Inflation targeting, credit flows and financial stability in a regime change model Authors:  Willi Semmler - New School for Social Research (United States) [presenting]
Marco Gross - European Central Bank (Germany)
Abstract: Several papers point to the problem that inflation targeting models do not as of yet consider financial market stability that can considerably derail inflation targeting monetary policy. Credit flows and the instability of credit appear to be at the root of the financial instability problem. It has been however recently questioned whether a too early and too strong leaning against the wind policy by central banks might have higher cost than benefits in terms of output and employment loss. We include in an inflation targeting model a financial stabilization goal. We solve the model with NMPC. We estimate a regime-switching structural VAR for the euro area. Apart from standard macroeconomic variables, such as output gap, inflation, interest rates we also include loan volume, to study credit cost as well as credit volume effects. We estimate monetary policy shocks (identifying them via sign restrictions), under different regime assumptions to reveal the state-dependent effects of both interest rate and volume-based policies. We simulate and study regime dependent VARs and IRs for conventional and unconventional policies as well as policies affecting supply and demand of loans.