Room 3001

Ivan SHCHAPOV (CREST) “Monetary Tightening, Quantitative Easing, and Financial Stability”

Abstract: This paper analyses the effects of central bank balance sheet policies on financial and price stability in a framework with endogenous disruptions in financial intermediation. Central bank balance sheet expansions increase the frequency of financial stress episodes and their duration by inducing financial intermediaries to take on more risk in normal times and slowing their recapitalisation during a stress episode. Rapid monetary policy tightening induces financial stress that can be mitigated by central bank balance sheet expansions at significant cost to price stability. The optimal monetary policy mix balances the welfare costs of inflation and financial stress with the efficiency costs of balance sheet expansions. Optimal policy leans towards prevention of financial stress via accommodative conventional policy and limited balance sheet interventions.

Organizer : Suzanne BELLUE