Monetary Policy Tradeoffs Between Financial Stability and Price Stability

Malik Shukayev () and Alexander Ueberfeldt
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Malik Shukayev: University of Alberta, Department of Economics, Postal: 8-14 HM Tory Building, Edmonton, AB, T6G 2H4

No 2016-18, Working Papers from University of Alberta, Department of Economics

Abstract: We analyze the impact of interest rate policy on financial stability in an environment where banks can experience runs on their short-term liabilities forcing them to sell assets at fire sale prices. Price adjustment frictions and a state-dependent risk of financial crisis create the possibility of a policy tradeoff between price stability and financial stability. Focusing on Taylor rules with monetary policy possibly reacting to banks' short-term liabilities, we find that the optimized policy uses the extra tool to support investment at the expense of higher inflation and output volatility.

Keywords: Fire sales externality; short-term bank funding; business cycles; financial crisis (search for similar items in EconPapers)
JEL-codes: D62 E32 E44 G01 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2016-11-11
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Monetary policy tradeoffs between financial stability and price stability (2018)
Journal Article: Monetary policy tradeoffs between financial stability and price stability (2018)
Working Paper: Monetary Policy Tradeoffs Between Financial Stability and Price Stability (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:ris:albaec:2016_018

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