Monetary Policy and Financial Stability: In Search of Trade-offs

In the aftermath of the 2008 global ?nancial crisis, it has been argued that monetary policy should prevent raising ?nancial risk by responding actively to ?nancial imbalances. This paper investigates the extent to which a central bank’s reaction to ?nancial instability may be incompatible with its other macroeconomic stability objectives. The analytical framework relies on a New Keynesian model with an endogenous ?nancial bubble, where it is assumed that tightening monetary policy can dampen raising ?nancial risk. The paper concludes that a leaning against the wind strategy can generate trade-o?s between the traditional in?ation-output stability and ?nancial stability objectives.

Author: Armand Fouejieu A., Alexandra Popescu, Patrick Villieu
Volume: 2014.01
Publisher: INFER
Year: 2014
No. of pages: 29
Category: INFER working papers

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