Bringing Financial Stability into Monetary Policy

Eric M. Leeper, James M. Nason
2015 Social Science Research Network  
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more » ... bedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. WORKING PAPERS ARE OBTAINABLE FROM Sveriges Riksbank • Information Riksbank • SE-103 37 Stockholm Fax international: +46 8 787 05 26 Telephone international: +46 8 787 01 00 Abstract This paper arms central bank policy makers with ways to think about interactions between ...nancial stability and monetary policy. We frame the issue of whether to integrate ...nancial stability into monetary policy operating rules by appealing to the observation that in actual economies ...nancial markets are incomplete. Incomplete markets create ...nancial market frictions that prevent economic agents from perfectly sharing risk; in the absence of frictions, ...nancial (in)stability would be of no concern. Overcoming these frictions to improve risk sharing across economic agents is, in our view, the intent of policies geared toward ensuring ...nancial stability. There are many de...nitions of ...nancial stability. Although the de...nitions share the notion that ...nancial stability becomes an issue for policy makers when a breakdown in risk-sharing arrangements in ...nancial markets has a negative e¤ect on real economic activity, we give several examples that show this notion is too general for thinking about the role monetary policy might have in smoothing shocks to ...nancial stability. Examples include statistical models that seek to separate "good" from "bad" changes in private-sector debt aggregates, new Keynesian policy prescriptions grounded in neo-Wicksellian natural rate rules, and a historical episode involving the 1920s Federal Reserve. These examples raise a cautionary ‡ag for policy attempts to control the growth and the composition of debt that ...nancial markets produce. We conclude with some advice for revising central banks'Monetary Policy Reports.
doi:10.2139/ssrn.2635384 fatcat:setkgmhaf5bdrp3i5nz3tgduaa