Quantifying financial stability risks for monetary policy

Sulkhan Chavleishvili, Manfred Kremer () and Frederik Lund-Thomsen

Research Bulletin, 2021, vol. 115

Abstract: When inflationary pressures started intensifying in 2022, the world’s major central banks faced a dilemma. They could rapidly tighten monetary policy at the risk of fuelling financial distress after years of ultra-low interest rates and balance sheet expansion. Or they could take a more gradual approach to fighting inflation that would protect the financial system, but risk high inflation becoming entrenched. While severe financial instability may be an unlikely event (or “tail risk”), it can have devastating macroeconomic consequences. Quantifying financial stability trade-offs therefore requires a way to gauge the three-way interaction between monetary policy, financial stability conditions and tail risks to the economy. JEL Classification: C32, E37, E44, E52, G01

Keywords: cost-benefit analysis; financial stability; growth-at-risk; Monetary policy trade-offs; systemic risk (search for similar items in EconPapers)
Date: 2021-01
Note: 92197
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Journal Article: Quantifying financial stability risks for monetary policy (2024)
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