Macro seminar
Time : 12h15 – 13h30
Date : 17 Janvier 2024

Salle 3001

Alexander Haas (Oxford) “Monetary Policy in a Tightening Cycle”

Abstract: With inflation reaching levels not seen in more than thirty years, central banks in many advanced economies have embarked on a rapid tightening cycle over the past eighteen months. Interest rate hikes impose capital losses on bank balance sheets. As net worth declines, risks to financial stability grow. In recent months, this has reignited a debate on a potential trade-off between monetary and financial stability. In this paper, I set up a new-Keynesian model of savers and borrowers with banks subject to a principal-agent friction and the risk of a run on deposits. In the model, a contractionary rates policy depresses bank net worth and increases the risk of a run. I show that a limited expansion of the central bank balance sheet can address concerns about financial stability with little to no costs for the pursuit of monetary stability. Differences in the transmission of both monetary instruments are key for this result. A decomposition of bank net worth illustrates this and the financial sector implications of monetary policy. Further, a U.S. ‘pandemic era inflation’ scenario is used as a laboratory to analyse policy counterfactuals against the backdrop of heightened inflation and declining bank net worth. In this environment, a temporary balance sheet expansion successfully stabilizes bank net worth without adding significant inflationary pressure.

Organizer : Giovanni RICCO