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Monetary policy, financial stability, and the distribution of risk

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  • Evan F. Koenig

Abstract

In an economy in which debt obligations are fixed in nominal terms, but there are otherwise no nominal rigidities, a monetary policy that targets inflation inefficiently concentrates risk, tending to increase the financial distress that accompanies adverse real shocks. Nominal-income targeting spreads risk more evenly across borrowers and lenders, reproducing the equilibrium that one would observe if there were perfect capital markets. Empirically, inflation surprises have no independent influence on measures of financial strain once one controls for shocks to nominal GDP.

Suggested Citation

  • Evan F. Koenig, 2011. "Monetary policy, financial stability, and the distribution of risk," Working Papers 1111, Federal Reserve Bank of Dallas.
    • Handle: RePEc:fip:feddwp:1111
    DOI: 10.24149/wp1111
    Note: Published as: Koenig, Evan F. (2013), "Like a Good Neighbor: Monetary Policy, Financial Stability, and the Distribution of Risk," International Journal of Central Banking 9 (2): 57-82.
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    References listed on IDEAS

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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. NGDP Targeting: Some Questions
      by David Andolfatto in MacroMania on 2012-04-28 02:35:00
    2. "NGDP Targeting: Some Questions"
      by Mark Thoma in Economist's View on 2012-04-27 20:14:19
    3. "NGDP Targeting: Some Questions"
      by Economists View in FavStocks on 2012-04-28 12:25:22

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    Cited by:

    1. Eagle, David M. & Christensen, Lars, 2012. "Two Equations on the Pareto-Efficient Sharing of Real GDP Risk," MPRA Paper 41051, University Library of Munich, Germany.
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    3. Alfred Duncan & Charles Nolan, 2015. "Objectives and Challenges of Macroprudential Policy," Working Papers 2015_22, Business School - Economics, University of Glasgow.

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    Keywords

    Debt; Inflation risk;

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