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Trade-offs between macroeconomic and financial stability objectives

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  • Fouejieu, Armand
  • Popescu, Alexandra
  • Villieu, Patrick

Abstract

Ten years after the 2008-09 global financial crisis, most advanced economies have recovered and global economic growth has taken hold. However, partly due to accommodative financial conditions, financial risks are on the rise while inflation remains subdued. This revives the debate on the role of monetary policy in containing financial risks. This paper provides a framework to investigate trade-offs between macroeconomic and financial stability when the central bank has a financial stability objective. Relying on a New Keynesian model with an endogenous financial bubble, our simulations suggest that a central bank attempting to “lean against the wind” may face trade-offs between inflation/output stability and financial stability. We therefore argue that the interest rate should be used for achieving traditional macroeconomic goals, and a second, macroprudential instrument should complement the policy rate to tackle financial risk accumulation.

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  • Fouejieu, Armand & Popescu, Alexandra & Villieu, Patrick, 2019. "Trade-offs between macroeconomic and financial stability objectives," Economic Modelling, Elsevier, vol. 81(C), pages 621-639.
    • Handle: RePEc:eee:ecmode:v:81:y:2019:i:c:p:621-639
    DOI: 10.1016/j.econmod.2019.02.006
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    Cited by:

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    More about this item

    Keywords

    Monetary policy objectives; Financial stability; Trade-offs;
    All these keywords.

    JEL classification:

    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • 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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