Monetary Policy and Financial Stability

36 Pages Posted: 28 Mar 2023 Last revised: 18 Jan 2024

See all articles by Joao F. Gomes

Joao F. Gomes

The Wharton School

Sergey Sarkisyan

The Wharton School, University of Pennsylvania

Date Written: January 8, 2024

Abstract

How should monetary policy respond to evolving financial conditions? To answer this question we develop and Bayesian estimate a dynamic macro model with a detailed financial sector and long-term defaultable nominal debt contracts to quantify how monetary policy response to movements in credit conditions can mitigate losses in aggregate consumption and output associated with macro fluctuations. We show that a (credible) monetary policy rule that includes credit spreads is often welfare-improving and generally obviates 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 (January 8, 2024). 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
3620 Locust Walk
Philadelphia, PA 19104
United States
215-898-3666 (Phone)
215-898-6200 (Fax)

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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