Paper #1810

Títol:

Monetary policy and endogenous financial crises

Autors:

F. Boissay, F. Collard, Jordi Galí i C. Manea

Data:

Desembre 2021

Resum:

What are the channels through which monetary policy affects financial stability? Can (and should) central banks prevent financial crises by deviating from price stability? To what extent may monetary policy itself unintendedly brew financial vulnerabilities? We answer these questions using a New Keynesian model with capital accumulation and endogenous financial crises due to adverse selection and moral hazard in credit markets. Our findings are threefold. First, monetary policy affects the probability of a crisis both in the short–run (via aggregate demand) and in the medium–run (via capital accumulation). Second, the central bank can reduce the incidence of crises in the medium–run by tolerating higher inflation volatility in the short–run. Third, prolonged periods of loose monetary policy followed by a sharp tightening can lead to financial crises.

Paraules clau:

Inflation targeting, low–for–long policy rate, adverse selection, financial crises

Codis JEL:

E1, E3, E6, G01.

Àrea de Recerca:

Macroeconomia i Economia Internacional

Publicat a:

Review of Economic Studies

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