IMF paper incorporates financial sector risk in monetary policy models

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An International Monetary Fund paper published on Friday considers the case for including financial stability indicators in central bank interest rate reaction models.

Dale Gray, Carlos García, Leonardo Luna and Jorge Restrep, the paper's authors, build a model of financial sector vulnerability to examine whether central banks should include explicitly the financial stability indicators in their monetary policy reaction function.

The authors find that including the distance-to-default of the

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