Arbeitspapier

Monetary policy, financial conditions, and financial stability

In the conduct of monetary policy, there exists a risk-return trade-off between financial conditions and financial stability, which complements monetary policy's traditional trade-off between inflation and real activity. The trade-off exists even if monetary policy does not target financial stability considerations independently of its inflation and real activity goals, because risks to future financial stability are increased by the buildup of financial vulnerabilities from persistent accommodative monetary policy when the economy is close to potential. We review monetary policy transmission channels and financial frictions that give rise to this trade-off between financial conditions and financial stability, within a monitoring program across asset markets, banking firms, shadow banking, and the nonfinancial sector. We focus on vulnerabilities that affect monetary policy's risk-return trade-off, including 1) pricing of risk, 2) leverage, 3) maturity and liquidity mismatch, and 4) interconnectedness and complexity. We also discuss the extent to which structural and time-varying macroprudential policies can counteract the buildup of vulnerabilities, thus mitigating monetary policy's risk-return trade-off.

Language
Englisch

Bibliographic citation
Series: Staff Report ; No. 690

Classification
Wirtschaft
Monetary Policy
Financial Crises
Financial Institutions and Services: Government Policy and Regulation
Subject
risk-taking channel of monetary policy
monetary policy transmission
monetary policy rules
financial stability
financial conditions
macroprudential policy

Event
Geistige Schöpfung
(who)
Adrian, Tobias
Liang, Nellie
Event
Veröffentlichung
(who)
Federal Reserve Bank of New York
(where)
New York, NY
(when)
2014

Handle
Last update
10.03.2025, 11:45 AM CET

Data provider

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Object type

  • Arbeitspapier

Associated

  • Adrian, Tobias
  • Liang, Nellie
  • Federal Reserve Bank of New York

Time of origin

  • 2014

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