Mercredi | 2014-01-15
B103

Armand FOUEJIEU AZANGUE – Alexandra POPESCU – Patrick VILLIEU

The concern for fi nancial stability has gained increasing interest for monetary policy making. In the aftermath of the 2008 global financial crisis, it has been argued that monetary policy should prevent or dampen raising fi nancial risk by responding actively to fi nancial imbalances. This paper investigates the extent to which central bank’s reaction to fi nancial instability may be incompatible with its other macroeconomic stability objectives. The analytical framework relies on a New Keynesian model with an endogenous fi nancial bubble, where it is assumed that tightening monetary policy can dampen raising financial risk. The paper concludes that, the monetary policy framework in which the central bank is directly concerned with fi nancial issues when setting the short term interest rate can generate trade-o ffs between real (inflation and output) and financial stability.