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Monetary Policy and Financial Stability: In Search of Trade-offs

Author

Listed:
  • Armand Fouejieu A.

    (University of Orleans)

  • Alexandra Popescu

    (University of Orleans)

Abstract

In the aftermath of the 2008 global financial crisis, it has been argued that monetary policy should prevent raising financial risk by responding actively to financial imbalances. This paper investigates the extent to which a central bank’s reaction to financial instability may be incompatible with its other macroeconomic stability objectives. The analytical framework relies on a New Keynesian model with an endogenous financial bubble, where it is assumed that tightening monetary policy can dampen raising financial risk. The paper concludes that a leaning against the wind strategy can generate trade-offs between the traditional inflation-output stability and financial stability objectives.

Suggested Citation

  • Armand Fouejieu A. & Alexandra Popescu, 2014. "Monetary Policy and Financial Stability: In Search of Trade-offs," Working Papers 2014.01, International Network for Economic Research - INFER.
  • Handle: RePEc:inf:wpaper:2014.01
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    Cited by:

    1. Alexey Vasilenko, 2018. "Should Central Banks Prick Asset Price Bubbles? An Analysis Based on a Financial Accelerator Model with an Agent-Based Financial Market," Bank of Russia Working Paper Series wps35, Bank of Russia.
    2. Alexey Vasilenko, 2017. "Should Monetary Authorities Prick Asset Price Bubbles? Evidence from a New Keynesian Model with an Agent-Based Financial Market," HSE Working papers WP BRP 182/EC/2017, National Research University Higher School of Economics.

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