Navigating Trade-Offs between Price and Financial Stability in Times of High Inflation

Romain Bouis, Damien Capelle, Giovanni Dell'Ariccia, Christopher Erceg, Maria Martinez Peria, Mouhamadou Sy, Ken Teoh and Jerome Vandenbussche

No 2025/003, IMF Staff Discussion Notes from International Monetary Fund

Abstract: Trade-offs between price and financial stability can occur when inflation is above target and financial stress is rising. Use of central bank liquidity tools and other financial stability policies may, under some circumstances, allow central banks to maintain their inflation fighting stance, while addressing financial stress. However, challenges in deploying these tools and specific country characteristics may hinder central banks’ ability to achieve both price and financial stability. In such circumstances, central banks should account for financial stress increasing downside risks to activity, allow for slower disinflation using monetary policy flexibility, and communicate that deviations from the medium-term inflation target are temporary. Countries with weak central bank credibility, high exposure to exchange rate movements, and limited fiscal space face extra challenges in managing these trade-offs and might have to rely on foreign exchange interventions, macroprudential policies, capital flow measures, and international liquidity tools.

Keywords: Monetary Policy; Financial Stability; Policy Coordination; monetary policy tightening; liquidity from the discount window; monetary policy flexibility; resolution framework; asset purchase; Financial sector stability; Price stabilization; Inflation; Liquidity; Global (search for similar items in EconPapers)
Pages: 50
Date: 2025-04-11
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.imf.org/external/pubs/cat/longres.aspx?sk=565220 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:imf:imfsdn:2025/003

Ordering information: This working paper can be ordered from
http://www.imf.org/external/pubs/pubs/ord_info.htm

Access Statistics for this paper

More papers in IMF Staff Discussion Notes from International Monetary Fund International Monetary Fund, Washington, DC USA. Contact information at EDIRC.
Bibliographic data for series maintained by Akshay Modi ().