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Monetary policy and financial stability in a banking economy: Transmission mechanism and policy tradeoffs

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  • Barnea, Emanuel
  • Landskroner, Yoram
  • Sokoler, Meir

Abstract

The 2008 global financial crisis demonstrated that monetary policy and financial stability policy are more highly interrelated than previously thought. This paper analyzes the interactions between these policies using a non-linear overlapping-generations model with financial frictions in the form of banking financial intermediation. The paper embeds negative externalities due to contagion effects in physical investments which creates the need for financial stability policy. We show how the monetary policy transmission mechanism depends on financial stability policy tools as well as on regulatory and institutional constraints.

Suggested Citation

  • Barnea, Emanuel & Landskroner, Yoram & Sokoler, Meir, 2015. "Monetary policy and financial stability in a banking economy: Transmission mechanism and policy tradeoffs," Journal of Financial Stability, Elsevier, vol. 18(C), pages 78-90.
    • Handle: RePEc:eee:finsta:v:18:y:2015:i:c:p:78-90
    DOI: 10.1016/j.jfs.2015.03.002
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    2. Agénor, Pierre-Richard & Flamini, Alessandro, 2022. "Institutional mandates for macroeconomic and financial stability," Journal of Financial Stability, Elsevier, vol. 62(C).
    3. Fouda Owoundi, Jean-Pierre & Mbassi, Christophe Martial & Owoundi, Ferdinand, 2021. "Does inflation targeting weaken financial stability? Assessing the role of institutional quality," The Quarterly Review of Economics and Finance, Elsevier, vol. 80(C), pages 374-398.
    4. Agénor, Pierre-Richard & Jia, Pengfei, 2020. "Capital controls and welfare with cross-border bank capital flows," Journal of Macroeconomics, Elsevier, vol. 65(C).
    5. Byrne, David & Kelly, Robert, 2019. "Monetary policy expectations and risk-taking among U.S. banks," Research Technical Papers 6/RT/19, Central Bank of Ireland.
    6. Horvath, Roman & Kotlebova, Jana & Siranova, Maria, 2018. "Interest rate pass-through in the euro area: Financial fragmentation, balance sheet policies and negative rates," Journal of Financial Stability, Elsevier, vol. 36(C), pages 12-21.
    7. Paola D'Orazio & Lilit Popoyan, 2020. "Taking up the climate change challenge: a new perspective on central banking," LEM Papers Series 2020/19, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
    8. Agénor, Pierre-Richard, 2019. "Growth And Welfare Effects Of Macroprudential Regulation," Macroeconomic Dynamics, Cambridge University Press, vol. 23(8), pages 3140-3162, December.
    9. Ranjan Kumar Mohanty & N R Bhanumurthy, 2020. "Asymmetric Monetary Policy Transmission in India:Does Financial Friction Matter?," BASE University Working Papers 03/2020, BASE University, Bengaluru, India.
    10. Cerrone, Rosaria & Cocozza, Rosa & Curcio, Domenico & Gianfrancesco, Igor, 2017. "Does prudential regulation contribute to effective measurement and management of interest rate risk? Evidence from Italian banks," Journal of Financial Stability, Elsevier, vol. 30(C), pages 126-138.
    11. Iwanicz-Drozdowska Małgorzata & Kurowski Łukasz, 2021. "Keep your friends close and your enemies closer – the case of monetary policy and financial imbalances," German Economic Review, De Gruyter, vol. 22(4), pages 383-414, November.
    12. Silva, Walmir & Kimura, Herbert & Sobreiro, Vinicius Amorim, 2017. "An analysis of the literature on systemic financial risk: A survey," Journal of Financial Stability, Elsevier, vol. 28(C), pages 91-114.

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