Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/171940
Authors: 
Shukayev, Malik
Ueberfeldt, Alexander
Year of Publication: 
2016
Series/Report no.: 
Bank of Canada Staff Working Paper 2016-49
Abstract: 
We analyze the impact of interest rate policy on financial stability in an environment where banks can experience runs on their short-term liabilities, forcing them to sell assets at fire-sale prices. Price adjustment frictions and a state-dependent risk of financial crisis create the possibility of a policy tradeoff between price stability and financial stability. Focusing on Taylor rules with monetary policy possibly reacting to banks' short-term liabilities, we find that the optimized policy uses the extra tool to support investment at the expense of higher inflation and output volatility.
Subjects: 
Monetary policy framework
Financial stability
Transmission of monetary policy
JEL: 
E44
D62
G01
E32
Document Type: 
Working Paper

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