Monetary Policy and Financial Stability

39 Pages Posted: 28 Mar 2023

See all articles by Joao F. Gomes

Joao F. Gomes

The Wharton School

Sergey Sarkisyan

The Wharton School, University of Pennsylvania

Date Written: March 19, 2023

Abstract

How should monetary policy respond to deteriorating financial conditions? We develop and estimate a dynamic new Keynesian model with financial intermediaries and sticky long-term corporate leverage to show that active response to movements in credit conditions helps to mitigate losses in aggregate consumption and output associated with macro fluctuations. A (credible) monetary policy rule that includes credit spreads is thus welfare-improving, sometimes even obviating the need for explicit inflation targeting.

Keywords: Credit spreads, monetary policy rules, financial stability

JEL Classification: E12, E43, E44, E52, G32

Suggested Citation

Gomes, João F. and Sarkisyan, Sergey, Monetary Policy and Financial Stability (March 19, 2023). Available at SSRN: https://ssrn.com/abstract=4393209 or http://dx.doi.org/10.2139/ssrn.4393209

João F. Gomes

The Wharton School ( email )

2329 SH-DH
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HOME PAGE: http://fnce.wharton.upenn.edu/profile/gomesj/

Sergey Sarkisyan (Contact Author)

The Wharton School, University of Pennsylvania ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States

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