Monetary Policy When the Central Bank Shapes Financial-Market Sentiment
Recent research has found that monetary policy works in part by influencing the risk premiums on both traded financial-market securities and intermediated loans. Research has also shown that when risk premiums are compressed, there is an increased likelihood of a reversal that damages the credit-supply mechanism and the real economy. Together these effects create an intertemporal tradeoff for monetary policy, as stimulating the economy today can sow the seeds of a future downturn that might be difficult to offset. We introduce a simple model of this tradeoff and draw out its implications for the conduct of monetary policy.
-
-
Copy CitationAnil K Kashyap and Jeremy C. Stein, "Monetary Policy When the Central Bank Shapes Financial-Market Sentiment," NBER Working Paper 30751 (2022), https://doi.org/10.3386/w30751.Download Citation
Published Versions
Anil K Kashyap & Jeremy C. Stein, 2023. "Monetary Policy When the Central Bank Shapes Financial-Market Sentiment," Journal of Economic Perspectives, vol 37(1), pages 53-75.
Related
More from the NBER
In addition to working papers, the NBER disseminates affiliates’ latest findings through a range of free periodicals — the NBER Reporter, the NBER Digest, the Bulletin on Health, and the Bulletin on Entrepreneurship — as well as online conference reports, video lectures, and interviews.
