Monetary Policy When the Central Bank Shapes Financial-Market Sentiment
Journal of Economic Perspectives
vol. 37,
no. 1, Winter 2023
(pp. 53-76)
(Complimentary)
Abstract
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 draw out some implications of this tradeoff for the conduct of monetary policy.Citation
Kashyap, Anil K, and Jeremy C. Stein. 2023. "Monetary Policy When the Central Bank Shapes Financial-Market Sentiment." Journal of Economic Perspectives, 37 (1): 53-76. DOI: 10.1257/jep.37.1.53Additional Materials
JEL Classification
- E23 Macroeconomics: Production
- E43 Interest Rates: Determination, Term Structure, and Effects
- E44 Financial Markets and the Macroeconomy
- E52 Monetary Policy
- E58 Central Banks and Their Policies
- G12 Asset Pricing; Trading Volume; Bond Interest Rates
- G21 Banks; Depository Institutions; Micro Finance Institutions; Mortgages
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