September 2013 issue contents
(Un)anticipated Monetary Policy in a DSGE Model with a Shadow Banking System

by Fabio Verona,a,b Manuel M. F. Martins,b and InĂªs Drumondb,c


Motivated by the U.S. events of the 2000s, we address whether a too low for too long interest rate policy may generate a boom-bust cycle. We simulate anticipated and unanticipated monetary policies in state-of-the-art DSGE models and in a model with bond financing via a shadow banking system, in which the bond spread is calibrated for normal and optimistic times. Our results suggest that the U.S. boom-bust was caused by the combination of (i) too low for too long interest rates, (ii) excessive optimism, and (iii) a failure of agents to anticipate the extent of the abnormally favorable conditions.

JEL Codes: E32, E44, E52, G24.

Full article (PDF, 46 pages 1529 kb)

a Bank of Finland 
b University of Porto, CEF.UP 
c DG-ECFIN, European Commission