Accommodating policy definition
They show that a larger response would not meet the cost-benefit test in their estimated model.
The intuition is that, based on historical relationships, higher rates do not much reduce the already low probability of a financial crisis in the future, but they have considerable costs in terms of higher unemployment and dangerously low inflation in the near- to intermediate terms.
From February 2006 through January 2014, he was Chairman of the Board of Governors of the Federal Reserve System. Bernanke also served as Chairman of the Federal Open Market Committee, the System's principal monetary policymaking body.
In their efforts to promote financial stability, central banks should focus their efforts on improving their supervisory, regulatory, and macroprudential policy tools. Bernanke is a Distinguished Fellow in Residence with the Economic Studies Program at the Brookings Institution.
Lars argued at the time that the likely benefits of such actions were far less than the costs.
(More recently, using estimates of the effects of monetary policy on the economy published by the Riksbank itself, he showed that the expected benefits of the increases were less than 1 percent of the expected costs).
To check the robustness of the results, the authors consider what happens if the likelihood of a crisis is much more sensitive (for stats geeks: two standard deviations more sensitive) to monetary policy than is consistent with historical data.
They find that, in this case, setting the short-term interest rate 25 to 45 basis points higher than it would otherwise be could be justified on cost-benefit grounds.This part of our website is for the attention of “Professional” investors.