Working Paper: NBER ID: w30751
Authors: Anil K. Kashyap; Jeremy C. Stein
Abstract: Recent research has found that monetary policy works in part by influencing the risk premiums on both traded financial-market securities and intermediated loans. Research has also shown that when risk premiums are compressed, there is an increased likelihood of a reversal that damages the credit-supply mechanism and the real economy. Together these effects create an intertemporal tradeoff for monetary policy, as stimulating the economy today can sow the seeds of a future downturn that might be difficult to offset. We introduce a simple model of this tradeoff and draw out its implications for the conduct of monetary policy.
Keywords: No keywords provided
JEL Codes: E44; E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Monetary policy (E52) | risk premiums (G19) |
| risk premiums (G19) | asset prices (G19) |
| Monetary policy (E52) | asset prices (G19) |
| Accommodative monetary policy (E52) | aggregate demand (E00) |
| Accommodative monetary policy (E52) | likelihood of future recessions (E32) |
| Historical path of monetary policy (E52) | neutral real interest rate (E43) |
| Credit growth (E51) | probability of financial crises (G01) |
| Elevated sentiment (E32) | economic downturns (F44) |