Trade-offs between macroeconomic and financial stability objectives

Armand Fouejieu, Alexandra Popescu and Patrick Villieu

Economic Modelling, 2019, vol. 81, issue C, 621-639

Abstract: Ten years after the 2008-09 global financial crisis, most advanced economies have recovered and global economic growth has taken hold. However, partly due to accommodative financial conditions, financial risks are on the rise while inflation remains subdued. This revives the debate on the role of monetary policy in containing financial risks. This paper provides a framework to investigate trade-offs between macroeconomic and financial stability when the central bank has a financial stability objective. Relying on a New Keynesian model with an endogenous financial bubble, our simulations suggest that a central bank attempting to “lean against the wind” may face trade-offs between inflation/output stability and financial stability. We therefore argue that the interest rate should be used for achieving traditional macroeconomic goals, and a second, macroprudential instrument should complement the policy rate to tackle financial risk accumulation.

Keywords: Monetary policy objectives; Financial stability; Trade-offs (search for similar items in EconPapers)
JEL-codes: E44 E52 E58 E61 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:81:y:2019:i:c:p:621-639

DOI: 10.1016/j.econmod.2019.02.006

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