Monetary Policy Strategies and Tools: Financial Stability Considerations

Abstract

This paper examines potential interactions between financial stability and the monetary policy strategies and tools considered in the Federal Reserve’s review of monetary policy strategy, tools, and communication practices. Achieving the Federal Reserve’s goals of full employment and price stability promotes financial stability. A key concern, however, is that with a low equilibrium real interest rate, a low policy rate will be necessary, and in turn, these low rates may contribute to an increase in financial system vulnerabilities. Our analysis suggests that there are typically significant macroeconomic and financial stability benefits of using these tools and strategies, but there are plausible situations in which financial vulnerabilities are such that it would be desirable to limit their use. A clear communications strategy can help minimize financial vulnerabilities. Should vulnerabilities arise, they are often best addressed with macroprudential tools.

Average Inflation Targeting and Household Expectations

“…For example,Chung et al (2020) on inflation target ranges,Goldberg et al (2020) on monetary policy strategies and financial stability,Feiveson et al (2020) on the distributional effects of average inflation targeting, Crump et al (2020) on unemployment rate benchmarks, Carlson et al (2020) on balance sheet tools, Campbell et al (2020) on the use of the policy rate tool, Hebden et al (2020) on the sensitivity of average inflation targeting to different modeling assumptions, Arias et al (2020) on how make-up strategies can work, Duarte et al (2020) on time inconsistency issues associated with average inflation targeting, Ajello et al (2020) on monetary policy tradeoffs and the dual mandate, and Caldara et al (2020) on the effectiveness…”

Philosophical Foundations of Economics – A Comparative Study of Islamic Economics, Capitalism and Marxism

“…In theory, monetary policy is primarily concerned with the regulation of money supply, and financial (banking) system of a country in order to achieve objectives including price stability, economic growth, full employment, exchange rate stability, etc., but in practice it is failed in serving its underlying objectives. In capitalist economy, money supply is regulated through different tools such as interest rate, bank rate, open market operations, credit rationing, and reserve ratio to overcome inflationary and deflationary trends in an economy (Goldberg et al, 2020). Monetary policy could be refined in the light of Islamic economics.…”

Quantifying Financial Stability Trade-Offs for Monetary Policy: A Quantile VAR Approach

“…A strength of this "monetary policy stress-testing framework" is that it does not require an intertemporal trade-off between systemic vulnerabilities and systemic stress to be present in the estimated model coefficients. 1 Instead, any potential boom-bust cycle can be modelled through appropriate scenarios in which financial imbalances 1 The infrequent nature of financial crises in history makes the relationship between indicators of vulnerability and the probability of future financial crises hard to estimate (Goldberg et al (2020)). This notwithstanding, estimates for the euro area model reveal a moderate financial boom-bust relationship between the SRI and the CISS.…”