This article analyzes whether market-based financial stability indicators (FSIs) should be included in monetary policy models and, if so, how.1 Since the economy and interest rates affect financial sector credit risk, and the financial sector affects the economy, this article builds a model of...

This paper proposes a new approach to improve the way central banks can analyze and manage the financial risks of a national economy. It is based on the modern theory and practice of contingent claims analysis (CCA), which is successfully used today at the level of individual banks by managers,...