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Inflation Targeting and Financial Stability

  • Michael Woodford

A number of commentators have argued that the desirability of inflation targeting as a framework for monetary policy analysis should be reconsidered in light of the global financial crisis, on the ground that it requires neglect of the implications of monetary policy for financial stability. This paper argues that monetary policy may indeed affect the severity of risks to financial stability, but that it is possible to generalize an inflation targeting framework to take account of financial stability concerns alongside traditional stabilization objectives. The resulting framework can still be viewed as a form of flexible inflation targeting; in particular, the paper proposes a target criterion that would still imply an invariant long-run price level, despite fluctuations over time in risks to financial stability or even the occurrence of occasional financial crises.

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File URL: http://www.nber.org/papers/w17967.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17967.

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Date of creation: Apr 2012
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Handle: RePEc:nbr:nberwo:17967
Note: ME
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  1. Michael Woodford, 2007. "Forecast Targeting as a Monetary Policy Strategy: Policy Rules in Practice," NBER Working Papers 13716, National Bureau of Economic Research, Inc.
  2. Michael Woodford, 2010. "Financial Intermediation and Macroeconomic Analysis," Journal of Economic Perspectives, American Economic Association, vol. 24(4), pages 21-44, Fall.
  3. Troy Davig & Craig Hakkio, 2010. "What is the effect of financial stress on economic activity," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 35-62.
  4. Claudio Borio & Mathias Drehmann, 2009. "Assessing the risk of banking crises - revisited," BIS Quarterly Review, Bank for International Settlements, March.
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