Monetary Policy as Financial Stability Regulation
This article develops a model that speaks to the goals and methods of financial stability policies. There are three main points. First, from a normative perspective, the model defines the fundamental market failure to be addressed, namely, that unregulated private money creation can lead to an externality in which intermediaries issue too much short-term debt and leave the system excessively vulnerable to costly financial crises. Second, it shows how in a simple economy where commercial banks are the only lenders, conventional monetary policy tools such as open-market operations can be used to regulate this externality, whereas in more advanced economies it may be helpful to supplement monetary policy with other measures. Third, from a positive perspective, the model provides an account of how monetary policy can influence bank lending and real activity, even in a world where prices adjust frictionlessly and there are other transactions media besides bank-created money that are outside the control of the central bank. Copyright 2012, Oxford University Press.
Year of publication: |
2012
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Authors: | Stein, Jeremy C. |
Published in: |
The Quarterly Journal of Economics. - Oxford University Press, ISSN 1531-4650. - Vol. 127.2012, 1, p. 57-95
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Publisher: |
Oxford University Press |
Saved in:
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