In the aftermath of the 2008 global ﬁnancial crisis, it has been argued that monetary policy should prevent raising ﬁnancial risk by responding actively to ﬁnancial imbalances. This paper investigates the extent to which a central bank’s reaction to ﬁnancial instability may be incompatible with its other macroeconomic stability objectives. The analytical framework relies on a New Keynesian model with an endogenous ﬁnancial bubble, where it is assumed that tightening monetary policy can dampen raising ﬁnancial risk. The paper concludes that a leaning against the wind strategy can generate trade-oﬀs between the traditional inﬂation-output stability and ﬁnancial stability objectives.
|Author:||Armand; Alexandra , Fouejieu A.; Popescu|
|No. of pages:||29|