Monetary Policy When the Central Bank Shapes Financial-Market Sentiment

Anil K Kashyap and Jeremy C. Stein

Journal of Economic Perspectives, 2023, vol. 37, issue 1, 53-76

Abstract: Recent research has found that monetary policy works in part by influencing the risk premiums on both traded financial-market securities and intermediated loans. Research has also shown that when risk premiums are compressed, there is an increased likelihood of a reversal that damages the credit-supply mechanism and the real economy. Together these effects create an intertemporal tradeoff for monetary policy, as stimulating the economy today can sow the seeds of a future downturn that might be difficult to offset. We draw out some implications of this tradeoff for the conduct of monetary policy.

JEL-codes: E23 E43 E44 E52 E58 G12 G21 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (11)

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DOI: 10.1257/jep.37.1.53

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