Paper #1810

Título:

Monetary policy and endogenous financial crises

Autores:

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

Fecha:

Diciembre 2021

Resumen:

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.

Palabras clave:

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

Códigos JEL:

E1, E3, E6, G01.

Área de investigación:

Macroeconomía y Economía Internacional

Publicado en:

Review of Economic Studies

Descargar el paper en formato PDF