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Monetary Policy When the Central Bank Shapes Financial-Market Sentiment

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  • Anil K Kashyap
  • Jeremy C. Stein

Abstract

Recent research has found that monetary policy works in part by influencing the risk premiums on both traded financial-market securities and intermediated loans. Research has also shown that when risk premiums are compressed, there is an increased likelihood of a reversal that damages the credit-supply mechanism and the real economy. Together these effects create an intertemporal tradeoff for monetary policy, as stimulating the economy today can sow the seeds of a future downturn that might be difficult to offset. We draw out some implications of this tradeoff for the conduct of monetary policy.

Suggested Citation

  • Anil K Kashyap & Jeremy C. Stein, 2023. "Monetary Policy When the Central Bank Shapes Financial-Market Sentiment," Journal of Economic Perspectives, American Economic Association, vol. 37(1), pages 53-76, Winter.
    • Handle: RePEc:aea:jecper:v:37:y:2023:i:1:p:53-76
    DOI: 10.1257/jep.37.1.53
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    Citations

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    Cited by:

    1. Maximilian Grimm & Òscar Jordà & Moritz Schularick & Alan M. Taylor, 2023. "Loose Monetary Policy and Financial Instability," Working Paper Series 2023-06, Federal Reserve Bank of San Francisco.
    2. Sushant Chari & Purva Hegde Desai & Nilesh Borde & Babu George, 2023. "Aggregate News Sentiment and Stock Market Returns in India," JRFM, MDPI, vol. 16(8), pages 1-18, August.
    3. Gianluca Benigno & Boris Hofmann & Galo Nuño Barrau & Damiano Sandri, 2024. "Quo vadis, r*? The natural rate of interest after the pandemic," BIS Quarterly Review, Bank for International Settlements, March.
    4. Chavleishvili, Sulkhan & Kremer, Manfred & Lund-Thomsen, Frederik, 2023. "Quantifying financial stability trade-offs for monetary policy: a quantile VAR approach," Working Paper Series 2833, European Central Bank.
    5. Neryvia Pillay & Konstantin Makrelov, 2024. "The lending implications of banks holding excess capital," Working Papers 11056, South African Reserve Bank.
    6. Guimaraes, Rodrigo & Pinter, Gabor & Wijnandts, Jean-Charles, 2023. "The liquidity state-dependence of monetary policy transmission," Bank of England working papers 1045, Bank of England.
    7. Willem Thorbecke, 2023. "The Impact of Monetary Policy on the U.S. Stock Market since the COVID-19 Pandemic," IJFS, MDPI, vol. 11(4), pages 1-15, November.
    8. Willem THORBECKE, 2023. "The Impact of Monetary Policy on the U.S. Stock Market since the Pandemic," Discussion papers 23054, Research Institute of Economy, Trade and Industry (RIETI).
    9. Axelsson, Birger & Song, Han-Suck, 2023. "The effect of quantitative easing and quantitative tightening on U.S. equity REIT returns," Working Paper Series 23/9, Royal Institute of Technology, Department of Real Estate and Construction Management & Banking and Finance, revised 14 Nov 2023.

    More about this item

    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • 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
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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