Monetary Policy and Endogenous Financial Crises

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ID: 313417
2026
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Abstract
Abstract What are the channels through which monetary policy affects financial stability? Can (and should) central banks prevent financial crises by deviating from price stability? To what extent may monetary policy itself unintentionally breed financial vulnerabilities? We answer these questions using a New Keynesian model with capital accumulation and endogenous financial crises due to adverse selection and moral hazard in credit markets. Our findings are threefold. First, monetary policy affects the probability of a crisis both in the short run (via aggregate demand) and in the medium run (via capital accumulation). Second, the central bank can reduce the incidence of crises in the medium run by tolerating higher inflation volatility in the short run. Third, prolonged periods of loose monetary policy followed by a sharp tightening can lead to financial crises.
Reference Key
openalex_W4324104410 Use this key to autocite in the manuscript while using SciMatic Manuscript Manager or Thesis Manager
Authors Frédéric Boissay, Fabrice Collard, Jordi Gaĺı, Cristina Manea
Journal The Review of Economic Studies
Year 2026
DOI
10.1093/restud/rdag042
URL
https://doi.org/10.1093/restud/rdag042
Keywords Keywords not found

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