Monetary Policy Strategies and Tools: Financial Stability Considerations

34 Pages Posted: 2 Sep 2020

See all articles by Jonathan E. Goldberg

Jonathan E. Goldberg

Board of Governors of the Federal Reserve System

Elizabeth Klee

Board of Governors of the Federal Reserve System

Edward S. Prescott

Federal Reserve Banks - Federal Reserve Bank of Cleveland

Paul R. Wood

Board of Governors of the Federal Reserve System

Date Written: August, 2020

Abstract

This paper examines potential interactions between financial stability and the monetary policy strategies and tools considered in the Federal Reserve’s review of monetary policy strategy, tools, and communication practices. Achieving the Federal Reserve’s goals of full employment and price stability promotes financial stability. A key concern, however, is that with a low equilibrium real interest rate, a low policy rate will be necessary, and in turn, these low rates may contribute to an increase in financial system vulnerabilities. Our analysis suggests that there are typically significant macroeconomic and financial stability benefits of using these tools and strategies, but there are plausible situations in which financial vulnerabilities are such that it would be desirable to limit their use. A clear communications strategy can help minimize financial vulnerabilities. Should vulnerabilities arise, they are often best addressed with macroprudential tools.

JEL Classification: E52, E58, G28

Suggested Citation

Goldberg, Jonathan E. and Klee, Elizabeth and Prescott, Edward (Ned) Simpson and Wood, Paul R., Monetary Policy Strategies and Tools: Financial Stability Considerations (August, 2020). FEDS Working Paper No. 2020-74, Available at SSRN: https://ssrn.com/abstract=3684911 or http://dx.doi.org/10.17016/FEDS.2020.074

Jonathan E. Goldberg (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

HOME PAGE: http://sites.google.com/view/jonathangoldberg/home

Elizabeth Klee

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Edward (Ned) Simpson Prescott

Federal Reserve Banks - Federal Reserve Bank of Cleveland ( email )

P.O. Box 6387
Cleveland, OH 44101
United States

HOME PAGE: http://https://www.clevelandfed.org/people-search?pid=f8ca941e-4b51-41f6-95f8-c87f1d3806e5

Paul R. Wood

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
202-452-2865 (Phone)
202-736-5638 (Fax)

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