Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/251016 
Year of Publication: 
2022
Series/Report no.: 
Working Paper No. WP 2022-06
Publisher: 
Federal Reserve Bank of Chicago, Chicago, IL
Abstract: 
This paper reviews the theoretical literature at the intersection of macroeconomics and finance to draw lessons on the connection between vulnerabilities in the financial system and the macroeconomy, and on how monetary policy affects that connection. This literature finds that financial vulnerabilities are inherent to financial systems and tend to be procyclical. Moreover, financial vulnerabilities amplify the effects of adverse shocks to the economy, so that even a small shock to fundamentals or a small revision of beliefs can create a self-reinforcing feedback loop that impairs credit provision, lowers asset prices, and depresses economic activity and inflation. Finally, monetary policy may affect the buildup of vulnerabilities, but the sign of the impact along some of its transmission channels is theoretically ambiguous and may vary with the state of the economy.
Subjects: 
monetary policy
financial stability
financial crises
credit
leverage
liquidity
asset prices
JEL: 
E32
E44
E58
G2
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

Files in This Item:
File
Size





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.