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Monetary policy consequences of financial stability interventions: Assessing the UK gilt crisis and the central bank policy response

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  • Bandera, Nicolò
  • Stevens, Jacob

Abstract

We study the tension between price and financial stability from a novel perspective: central bank asset purchases for financial stability during monetary policy tightening. We use as context a rare natural experiment, the 2022 UK gilt crisis, and develop a DSGE model featuring Non-Bank Financial Institutions to replicate the crisis and policy response. We find that asset purchases restore market functioning, and their temporary nature is crucial for avoiding a trade-off with monetary policy. Alternative tools such as repo loans and liquidity buffers can achieve the same goal with reduced impact on the central bank balance sheet. Our results show that central banks can ease financial market stress without loosening monetary policy, delivering on both objectives at all times.

Suggested Citation

  • Bandera, Nicolò & Stevens, Jacob, 2026. "Monetary policy consequences of financial stability interventions: Assessing the UK gilt crisis and the central bank policy response," European Economic Review, Elsevier, vol. 187(C).
    • Handle: RePEc:eee:eecrev:v:187:y:2026:i:c:s0014292126001042
    DOI: 10.1016/j.euroecorev.2026.105360
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    Keywords

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    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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