Monetary Policy When the Central Bank Shapes Financial-Market Sentiment

31 Pages Posted: 23 Dec 2022

See all articles by Anil K. Kashyap

Anil K. Kashyap

University of Chicago, Booth School of Business; National Bureau of Economic Research (NBER); Federal Reserve Bank of Chicago

Jeremy C. Stein

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: December 20, 2022

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 introduce a simple model of this tradeoff and draw out its implications for the conduct of monetary policy.

JEL Classification: E44,E52,E58

Suggested Citation

Kashyap, Anil K. and Stein, Jeremy C., Monetary Policy When the Central Bank Shapes Financial-Market Sentiment (December 20, 2022). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2022-166, Available at SSRN: https://ssrn.com/abstract=4304219 or http://dx.doi.org/10.2139/ssrn.4304219

Anil K. Kashyap (Contact Author)

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