Monetary policy tradeoffs between financial stability and price stability

Malik Shukayev () and Alexander Ueberfeldt

Canadian Journal of Economics, 2018, vol. 51, issue 3, 901-945

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.

JEL-codes: E44 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Monetary policy tradeoffs between financial stability and price stability (2018)
Working Paper: Monetary Policy Tradeoffs Between Financial Stability and Price Stability (2016)
Working Paper: Monetary Policy Tradeoffs Between Financial Stability and Price Stability (2016)
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