Instant cuts the right response to instability

Monetary policy that responds instantly to increased credit risk performs better than a policy that follows the traditional Taylor rule, research published by the International Monetary Fund finds.

The research extends the standard new Keynesian dynamic stochastic general equilibrium model with sticky prices to include a financial system. The simulations suggest that, if financial instability affects output and inflation with a lag and if the central bank has privileged information about credit

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