What is it about?

Federal Reserve's signals about the future conduct of monetary policy work differently in expansionary and recessionary environments. In normal, expansionary times, signals about future monetary *contractions* reduce systemic risk with a moderate effect. In recessions, signals about future monetary *expansions* reduce systemic risk and the effect is quite large. Stabilizing systemic risk, therefore, requires diametrically opposite approaches in different macroeconomic environments.

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Why is it important?

The Great Recession of 2008-2009 and the COVID-19 Recession of 2020 have both been marked by considerable financial instability. This paper provides insights into how monetary policy can help stabilize these dynamics.

Perspectives

This paper demonstrates how a technical toolkit developed for an entirely different purpose, namely, how information about future technological innovation can affect business cycle activity, can help inform the conduct of monetary policy in achieving financial stability.

Pavel Kapinos
Federal Reserve Bank of Dallas

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This page is a summary of: Monetary policy news and systemic risk at the zero lower bound, International Journal of Finance & Economics, August 2020, Wiley, DOI: 10.1002/ijfe.2047.
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