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Monetary Policy as Financial-Stability Regulation

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  • Jeremy C. Stein

Abstract

This paper develops a model that speaks to the goals and methods of financial-stability policies. There are three main points. First, from a normative perspective, the model defines the fundamental market failure to be addressed, namely that unregulated private money creation can lead to an externality in which intermediaries issue too much short-term debt and leave the system excessively vulnerable to costly financial crises. Second, it shows how in a simple economy where commercial banks are the only lenders, conventional monetary-policy tools such as open-market operations can be used to regulate this externality, while in more advanced economies it may be helpful to supplement monetary policy with other measures. Third, from a positive perspective, the model provides an account of how monetary policy can influence bank lending and real activity, even in a world where prices adjust frictionlessly and there are other transactions media besides bank-created money that are outside the control of the central bank.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16883.

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Date of creation: Mar 2011
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Publication status: published as “Monetary Policy as Financial-Stability Regulation,” Quarterly Journal of Economics, 127, February 2012, pp. 57-95.
Handle: RePEc:nbr:nberwo:16883

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  1. Gromb, Denis & Vayanos, Dimitri, 2002. "Equilibrium and welfare in markets with financially constrained arbitrageurs," Journal of Financial Economics, Elsevier, vol. 66(2-3), pages 361-407.
  2. Ashcraft, Adam & Garleanu, Nicolae Bogdan & Pedersen, Lasse Heje, 2010. "Two Monetary Tools: Interest Rates and Haircuts," CEPR Discussion Papers 8000, C.E.P.R. Discussion Papers.
  3. John Geanakoplos & Ana Fostel, 2008. "Leverage Cycles and the Anxious Economy," American Economic Review, American Economic Association, vol. 98(4), pages 1211-44, September.
  4. Brunnermeier, Markus K & Pedersen, Lasse Heje, 2007. "Market Liquidity and Funding Liquidity," CEPR Discussion Papers 6179, C.E.P.R. Discussion Papers.
  5. Olivier Jeanne & Anton Korinek, 2010. "Managing Credit Booms and Busts: A Pigouvian Taxation Approach," Working Paper Series WP10-12, Peterson Institute for International Economics.
  6. Guido Lorenzoni, 2008. "Inefficient Credit Booms," Review of Economic Studies, Oxford University Press, vol. 75(3), pages 809-833.
  7. Emmanuel Farhi & Mikhail Golosov & Aleh Tsyvinski, 2008. "A Theory of Liquidity and Regulation of Financial Intermediation," Levine's Working Paper Archive 122247000000002006, David K. Levine.
  8. Leeper, Eric M., 1991. "Equilibria under 'active' and 'passive' monetary and fiscal policies," Journal of Monetary Economics, Elsevier, vol. 27(1), pages 129-147, February.
  9. Tobias Adrian & Hyun Song Shin, 2008. "Financial intermediaries, financial stability, and monetary policy," Staff Reports 346, Federal Reserve Bank of New York.
  10. repec:bla:restud:v:75:y:2008:i:3:p:809-833 is not listed on IDEAS
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Cited by:
  1. Zoltan Pozsar, 2011. "Institutional Cash Pools and the Triffin Dilemma of the U.S. Banking System," IMF Working Papers 11/190, International Monetary Fund.
  2. Martin, A. & Skeie, D. & Thadden, E.L. von, 2010. "Repo Runs," Discussion Paper 2010-44S, Tilburg University, Center for Economic Research.
  3. Gabriel Jiménez & Atif Mian & José-Luis Peydró & Jesús Saurina, 2011. "Local versus aggregate lending channels: the effects of securitization on corporate credit supply," Banco de Espa�a Working Papers 1124, Banco de Espa�a.
  4. Solomon Sorin & Golo Natasa, 2013. "Minsky Financial Instability, Interscale Feedback, Percolation and Marshall–Walras Disequilibrium," Accounting, Economics, and Law, De Gruyter, vol. 3(3), pages 167-260, October.
  5. Nicola Gennaioli & Andrei Shleifer & Robert W. Vishny, 2010. "Neglected Risks, Financial Innovation, and Financial Fragility," NBER Working Papers 16068, National Bureau of Economic Research, Inc.
  6. Zhiguo He & Gregor Matvos, 2012. "Debt and Creative Destruction: Why Could Subsidizing Corporate Debt be Optimal?," NBER Working Papers 17920, National Bureau of Economic Research, Inc.
  7. Paolo Angelini & Sergio Nicoletti-Altimari & Ignazio Visco, 2012. "Macroprudential, microprudential and monetary policies: conflicts, complementarities and trade-offs," Questioni di Economia e Finanza (Occasional Papers) 140, Bank of Italy, Economic Research and International Relations Area.
  8. Lukas Scheffknecht, 2013. "Contextualizing Systemic Risk," ROME Working Papers 201317, ROME Network.
  9. Sorin Solomon & Natasa Golo, 2013. "Minsky Financial Instability, Interscale Feedback, Percolation and Marshall-Walras Disequilibrium," INET Research Notes 39, Institute for New Economic Thinking (INET).
  10. Milne, Alistair, 2013. "Register, cap and trade: A proposal for containing systemic liquidy risk," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 7(7), pages 1-31.

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