Exogenous financial shocks should factor into monetary policy: Dallas Fed paper
A Dallas Federal Reserve paper, published on Friday, shows that optimal monetary policy should respond to exogenous financial shocks that impact interbank lending spreads.
Scott Davis and Kevin Huang, the paper's authors, use a model with risk and balance sheet effects in both the real and financial sectors to examine whether central banks should respond directly to financial market conditions when setting monetary policy and, if so, how much weight should be placed on interbank lending spreads
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