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The optimal monetary instrument for prudential purposes

By Charles Goodhart, P. Sunirand and D. P. Tsomocos

Abstract

The purpose of this paper is to assess the choice between adopting a monetary base or an interest rate setting instrument to maintain financial stability. Our results suggest that the interest rate instrument is preferable, since during times of a panic or financial crisis the Central Bank automatically satisfies the increased demand for money. Thus, it prevents sharp losses in asset values and enhanced asset volatility

Topics: HG Finance
Publisher: Elsevier
Year: 2009
DOI identifier: 10.1016/j.jfs.2009.06.002
OAI identifier: oai:eprints.lse.ac.uk:30264
Provided by: LSE Research Online
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