Arbeitspapier

Monetary policy and endogenous financial crises

We study whether a central bank should deviate from its objective of price stability to promote financial stability. We tackle this question within a textbook New Keynesian model augmented with capital accumulation and microfounded endogenous financial crises. We compare several interest rate rules, under which the central bank responds more or less forcefully to inflation and output. Our main findings are threefold. First, monetary policy affects the probability of a crisis both in the short run (through aggregate demand) and in the medium run (through capital accumulation). Second, a central bank can both reduce the probability of a crisis and increase welfare by departing from strict inflation targeting and responding systematically to fluctuations in output. Third, financial crises may occur after a long period of unexpectedly loose monetary policy as the central bank abruptly reverses course.

ISBN
978-3-95729-889-8
Language
Englisch

Bibliographic citation
Series: Deutsche Bundesbank Discussion Paper ; No. 21/2022

Classification
Wirtschaft
Financial Crises
Subject
financial crisis
monetary policy

Event
Geistige Schöpfung
(who)
Boissay, Frédéric
Collard, Fabrice
Galí, Jordi
Manea, Cristina
Event
Veröffentlichung
(who)
Deutsche Bundesbank
(where)
Frankfurt a. M.
(when)
2022

Handle
Last update
10.03.2025, 11:42 AM CET

Data provider

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Object type

  • Arbeitspapier

Associated

  • Boissay, Frédéric
  • Collard, Fabrice
  • Galí, Jordi
  • Manea, Cristina
  • Deutsche Bundesbank

Time of origin

  • 2022

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