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Optimal Interest Rate Tightening With Financial Fragility

Excerpt:  “Recent events of financial market turbulence, including the collapse of Silicon Valley Bank and other regional banks in the US and the pension funds and liability-driven investment (LDI) crisis in the UK, have renewed concerns that monetary policy tightening to curb rising inflationary pressures could exacerbate financial instability. These events, and the possibility that interest rates remain higher for longer, raise important questions for policymakers. First, under what conditions can monetary policy tightening trigger or amplify financial instability? Second, how should monetary policy respond to inflation when there are tensions with financial stability goals? Third, how should other (non-interest) policy tools be used to better separate financial stability from price stability concerns?” (footnote omitted)

Report (80 pages)