ثبات مالی، هموارسازی نرخ بهره و تعادل معین شده

This paper examines the interaction between monetary policy and financial stability and provides an assessment of the implications of banks’ risk management practices for monetary policy. By considering the desire of the central bank to stabilize different types of the “basis” risk as a contribution to financial stability, we derive a set of plausible interest-rate rules characterized by either backward or forward interest-rate smoothing. The paper investigates the determinacy conditions of the rational expectations equilibria obtained under such rules. Contrary to what previously found in the literature, we find that the practice of smoothing interest rates backward does not in general alleviate problems of equilibrium indeterminacy. Moreover, basis risk stabilization may lead to policy rules embedding “forward” interest-rate smoothing, where a new kind of indeterminacy may arise following excessive concern for financial stability.

Central banks around the world have recently started to devote increasing attention to the objective of financial stability. This move has been associated, on one side, with the impressive progresses made in the fight against inflation; on the other side, with the many episodes of financial and currency crises that have continued to challenge the international financial system. The increasing relevance assigned by central banks to how to prevent or reduce the risk of financial crisis and of contagion waves has recently been considered a rationale in support of the stylized fact that interest rates seem to move gradually in response to changes in macroeconomic conditions (notably output gap and inflation). It has been argued that by making interest-rate changes smaller and more predictable, central banks reduce the volatility of banks’ profits and lower the risk of bank insolvencies. In this paper, we ask whether and how financial stability considerations interact with the mandate of central banks to pursue and maintain price stability. In the literature, this topic is currently at the centre of policy and academic debates. Investigations have followed different paths, going from institutional analysis of whether responsibilities for supervising banks and other financial institutions would be a natural assignment for central banks to theoretical and empirical studies of different kinds of central banks’ reaction functions. A recent strand of research focused on central banks’ practice of smoothing interest-rate movements by showing the optimality of such behaviour. In particular, Woodford (1999) showed that interest-rate smoothing is an essential ingredient of optimal monetary policy under commitment, and Woodford (2003b) showed that it is optimal to delegate (under discretion) monetary policy to a central bank with an interest-rate smoothing term in the objective function. Moreover, Woodford (2003a) and Bullard and Mitra (2007) showed that interest-rate smoothing can help alleviate problems of indeterminacy (and learning) of stationary rational expectations’ equilibria. In this literature, interest-rate smoothing is simply assumed without any formal link to interest-rate risk management by banks. However, given the hedging practices related to interest-rate risk followed by banks and other financial institutions, it is by no means obvious why central banks should smooth interest rates. We offer a new rationale for such behaviour based on the desire of central banks to stabilize “basis” risk, i.e. the residual risk that remains after all hedging opportunities have been exploited (see Hull, 2000), as a contribution to financial stability. We show that the desire of central banks to stabilize basis risk may lead to interest-rate rules characterized in equilibrium by either backward or forward interest-rate smoothing. We find that, contrary to the results in Woodford (2003a) and Bullard and Mitra (2007), backward interest-rate smoothing does not in general alleviate indeterminacy problems of rational expectations equilibria. In our analysis, it only makes determinacy easier to be reached in the limiting case of a particularly aggressive response to inflation and output, when the policy rate is assumed to react to expected future (not current) inflation. Moreover, we also show that interest-rate rules embedding excessive concern for financial stability, and leading in equilibrium to high “forward” interest-rate smoothing, may lead to indeterminacy and enhance the trade-off between price and financial stability. The paper is organized as follows. Section 2 discusses risk management practices used by banks and argues that these lower (although do not eliminate) the necessity for the central banks to smooth interest rates as a contribution to financial stability. Section 3 presents a formal analysis of equilibrium determinacy based on the explicit inclusion of an additional term in otherwise standard interest-rate rules (reacting to current or expected inflation and the output gap), with this additional term reflecting the desire of the central bank to stabilize basis risk. In Section 4 we use a different definition of the basis risk and derive in equilibrium a reaction function which takes into account the expected policy rate. Section 5 summarizes and concludes

This paper provides a first attempt to link banks’ risk management practices and interest-rate policy decisions by central banks who care about monetary and financial stability. We assume that the central bank is aware that financial institutions may hedge against the risk of sharp interest-rate movements by using derivatives. However, part of this risk, namely “basis” risk, cannot be hedged and hence provides a limited motivation for central banks to stabilize it as a contribution to financial stability. We show that the desire to stabilize basis risk leads central banks to smooth interest rates, either backward or forward. Backward interest-rate smoothing does not in general alleviate, as previously believed, indeterminacy problems. Moreover, under forward smoothing, it is possible that new indeterminacy problems are induced by large degrees of monetary inertia. Hence, a trade-off between monetary and financial stability emerges and may suggest to assign to central banks apreferredtarget in terms of price stability,while mainly pursuing financial stability through proper regulation and supervision of financial markets and intermediaries.