This paper argues that financial imbalances can build up in a low inflation environment and that in some circumstances it is appropriate for policy to respond to contain these imbalances. While identifying financial imbalances ex ante can be difficult, this paper presents empirical evidence that...

A growing challenge for central banks is to secure monetary and financial stability simultaneously. Indeed, somewhat paradoxically, success in controlling inflation can sometimes contribute to the development of imbalances that ultimately lead to financial stresses, with potentially serious...

This paper develops a structural, dynamic model of a banking firm to analyze how banks adjust their loan portfolios over time. In the model, banks experience capital shocks, face uncertain future loan demand, and incur costs based on their proximity to regulatory minimum capital requirements....