Research / BFI Working PaperDec 22, 2022

Monetary Policy When the Central Bank Shapes Financial-Market Sentiment

Anil Kashyap, Jeremy C. Stein

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 introduce a simple model of this tradeoff and draw out its implications for the conduct of monetary policy.

More Research From These Scholars

BFI Working Paper Dec 12, 2018

The Benchmark Inclusion Subsidy

Anil Kashyap, Natalia Kovrijnykh, Jian Li, Anna Pavlova
Topics:  Financial Markets