Economies 2014, 2(1), 1-19; doi:10.3390/economies2010001
Article

Financial Markets, Banking and the Design of Monetary Policy: A Stable Baseline Scenario

1 Institute of Empirical Economic Research, Osnabrück University, 49069 Osnabrück, Germany 2 Department of Business Administration and Economics, Bielefeld University, 33501 Bielefeld, Germany
* Author to whom correspondence should be addressed.
Received: 23 October 2013; in revised form: 9 December 2013 / Accepted: 10 December 2013 / Published: 30 December 2013
(This article belongs to the Special Issue Effects of Fiscal and Monetary Policy in the Great Recession)
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Abstract: A baseline integration of commercial banks into the disequilibrium framework with behavioral traders of Charpe et al. (2011, 2012) is presented. At the core of the analysis is the impact the banking sector exerts on the interaction of real and financial markets. Potentially destabilizing feedback channels in the presence of imperfect macroeconomic portfolio adjustment and heterogeneous expectations are investigated. Given the possible financial market instability, various policy instruments have to be applied in order to guarantee viable dynamics in the highly interconnected macroeconomy. Among those are open market operations reacting to the state-of-confidence in the economy and Tobin-type capital gain taxes. The need for policy intervention is even more striking, as the banking sector is modeled in a rather stability enhancing way, fulfilling its fundamental tasks of term transformation of savings and credit granting without engaging in investment activities itself.
Keywords: monetary business cycles; portfolio choice; credit and banking; (in-)stability; stabilizing policy measures

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MDPI and ACS Style

Hartmann, F.; Flaschel, P. Financial Markets, Banking and the Design of Monetary Policy: A Stable Baseline Scenario. Economies 2014, 2, 1-19.

AMA Style

Hartmann F, Flaschel P. Financial Markets, Banking and the Design of Monetary Policy: A Stable Baseline Scenario. Economies. 2014; 2(1):1-19.

Chicago/Turabian Style

Hartmann, Florian; Flaschel, Peter. 2014. "Financial Markets, Banking and the Design of Monetary Policy: A Stable Baseline Scenario." Economies 2, no. 1: 1-19.

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