Strong stability of discrete-time systems

The paper introduces a new notion of stability for internal (state-space) autonomous system descriptions in discrete-time, referred to as strong stability which extends a parallel notion introduced in the continuous-time case. This is a stronger notion of stability compared to alternative definitions (asymptotic, Lyapunov), which prohibits systems described by natural coordinates to have overshooting responses for arbitrary initial conditions in state-space. Three finer notions of strong stability are introduced and necessary and sufficient conditions are established for each one of them. The class of discrete-time systems for which strong and asymptotic stability coincide is characterized and links between the skewness of the eigen-frame and the violation of strong stability property are obtained. Connections between the notions of strong stability in the continuous and discrete-domains are briefly discussed. Finally strong stabilization problems under state and output feedback are studied. The results of the paper are illustrated with a numerical example

Fiscal consolidation : Dr Pangloss meets Mr Keynes

A simple dynamic framework is used to show how consolidation plans that are robust and effective at capacity output can be undermined by demand failure. If the market panics and interest rates rise, the process can indeed become dynamically unstable. Tightening fiscal policy to reassure financial markets can lead to a low level “consolidation trap”, however. Better that the Central Bank acts to keep interest rates low; and that fiscal consolidation efforts be state contingent – allowing room for economic stabilisation. The pro-cyclicality of fiscal policy could also be reduced if, as Shiller has argued, debt amortization were state contingent, being indexed to GD

The interest rate - exchange rate nexus: exchange rate regimes and policy equilibria

We study a credible Markov-perfect monetary policy in an open New Keynesian economy with incomplete financial markets. We demonstrate the existence of two discretionary equilibria. Following a shock the economy can be stabilised either 'quickly' or 'slow', both dynamic paths satisfy conditions of optimality and time-consistency. The model can help us to understand sudden change of the interest rate and exchange rate volatility in 'tranquil' and 'volatile' regimes even under a fully credible 'soft peg' of the nominal exchange rate in developing countries.Small open economy, Incomplete ?nancial markets, Discretionary Monetary policy, Multiple Equilibria

Monetary Policy in a Small Economy after Tsunami: A New Consensus on the Horizon?

The last financial crisis significantly changed views concerning the relationship between monetary policy, asset prices and financial stability. We survey the pre-crisis opinions on the appropriate monetary policy reactions to financial market developments and delineate the new consensus which is currently emerging from the lessons taken. The new consensus is an amended model of flexible inflation targeting in which the central bank “should sometimes lean and can clean”. We try to add the small open economy context to the debate and demonstrate that the optimal reactions of monetary policy-makers in small open economies may differ and that sometimes the optimal solution may not even be available due to the policies of the key world central banks acting as price makers. In such instances, second-best policies have to be considered.monetary policy, financial stability, asset markets, macroprudential policy