Financial stability, deflation, and monetary policy
AbstractThe paper explores the relationship between financial stability, deflation, and monetary policy. A discussion of narrow liquidity, broad liquidity, market liquidity, and financial distress provides the foundation for the analysis. There are two preliminary conclusions. Equity prices are a misleading guide for interest rate policy. Monetary policy tactics protect market liquidity while maximizing the central bank's leverage over longer-term interest rates and aggregate demand. ; Monetary policy is a fundamental source of deflation and stagnation risk when price stability is fully credible. A central bank can be fooled by its own credibility for low inflation into being insufficiently preemptive in a business expansion. Then monetary policy can be constrained by the zero bound from reducing real interest rates enough in the subsequent contraction. The chain of events that leads to deflation and stagnation can be weakened or broken in a number of places. Monetary policy has the power to preempt deflation and the power to overcome the zero bound to restore prosperity after a deflationary shock. Fiscal policy is likely to be relatively ineffective at best and counterproductive at worst.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Federal Reserve Bank of Richmond in its series Working Paper with number 01-01.
Date of creation: 2001
Date of revision:
Other versions of this item:
- Goodfriend, Marvin, 2001. "Financial Stability, Deflation, and Monetary Policy," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 19(S1), pages 143-167, February.
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2001-04-02 (All new papers)
- NEP-IFN-2001-04-02 (International Finance)
- NEP-MON-2001-04-02 (Monetary Economics)
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Christian Bordes & Laurent Clerc, 2007.
"Price Stability And The Ecb'S Monetary Policy Strategy,"
Journal of Economic Surveys,
Wiley Blackwell, vol. 21(2), pages 268-326, 04.
- Bordes, C. & Clerc, L., 2004. "Price Stability and The ECB's Monetary Policy Strategy," Working papers 109, Banque de France.
- Christian Bordes & Laurent Clerc, 2007. "Price Stability and the ECB'S monetary policy strategy," UniversitÃ© Paris1 PanthÃ©on-Sorbonne (Post-Print and Working Papers) hal-00308557, HAL.
- Takatoshi Ito & Frederic S. Mishkin, 2004.
"Two Decades of Japanese Monetary Policy and the Deflation Problem,"
NBER Working Papers
10878, National Bureau of Economic Research, Inc.
- Takatoshi Ito & Frederic S. Mishkin, 2006. "Two Decades of Japanese Monetary Policy and the Deflation Problem," NBER Chapters, in: Monetary Policy under Very Low Inflation in the Pacific Rim, NBER-EASE, Volume 15, pages 131-202 National Bureau of Economic Research, Inc.
- R. Kato & S. Nishiyama, 2002.
"Optimal Monetary Policy When Interest Rates are Bounded at Zero,"
Computing in Economics and Finance 2002
8, Society for Computational Economics.
- Kato, Ryo & Nishiyama, Shin-Ichi, 2005. "Optimal monetary policy when interest rates are bounded at zero," Journal of Economic Dynamics and Control, Elsevier, vol. 29(1-2), pages 97-133, January.
- Ryo Kato & Shinichi Nishiyama, 2001. "Optimal Monetary Policy When Interest Rates are Bound at Zero," Working Papers 01-12, Ohio State University, Department of Economics.
- Bergman, U. Michael & Hansen, Jan, 2002. "Financial Instability and Monetary Policy: The Swedish Evidence," Working Paper Series 137, Sveriges Riksbank (Central Bank of Sweden).
- Nagayasu, Jun, 2004.
"The Term Structure of Interest Rates and Monetary Policy during a Zero Interest Rate Period,"
Monetary and Economic Studies,
Institute for Monetary and Economic Studies, Bank of Japan, vol. 22(2), pages 19-43, May.
- Jun Nagayasu, 2003. "The Term Structure of Interest Rates and Monetary Policy During A Zero-Interest-Rate Period," IMF Working Papers 03/208, International Monetary Fund.
- M. Zouaoui & G. Nouyrigat & F. Beer, 2010. "How does investor sentiment affect stock market crises? Evidence from panel data," Post-Print halshs-00534754, HAL.
- Thorsten V. Koeppl, 2009. "How Flexible Can Inflation Targeting Be? Suggestions for the Future of Canada's Targeting Regime," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 293, August.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (William Perkins).
If references are entirely missing, you can add them using this form.