Managing price and financial stability objectives in inflation targeting economies in Asia and the Pacific |
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| Affiliation: | 1. Seoul National University, Department of Economics, San 56-1, Sillim-Dong, Gwanak-Gu, Seoul 151-746, South Korea;2. Bank for International Settlements, Centralbahnplatz 2, 4002 Basel, Switzerland;1. Czech National Bank, Na Příkopě 28, 115 03 Prague 1, Czech Republic;2. Charles University Prague, Ovocný trh 3-5, 116 36 Prague 1, Czech Republic;3. University of Finance and Administration Prague, Estonská 500/3, 101 00 Praha 10, Czech Republic;1. Research Department, Bank of Israel, Israel;2. College for Academic Studies and Hebrew University of Jerusalem, Israel;3. IMF External Advisor, Israel;1. University of Nottingham, School of Economics, University Park, Nottingham NG7 2RD, UK;2. Departamento de Economía Aplicada I, Universidad Rey Juan Carlos, P. de los Artilleros, 28032 Madrid, Spain;1. China Academy of Public Finance and Public Policy, Central University of Finance and Economics, #39, S. College Rd., Haidian Dist., Beijing, 100081, China;2. Lee Kuan Yew School of Public Policy, National University of Singapore, Singapore;1. London Business School, University of London, London, NW1 4SA, United Kingdom;2. Department of Law and Economics at Universidade Católica de Brasília, CEP 70790-160, Brasília-DF, Brazil;3. Department of Economics at Universidade de Brasília, FACE, CEP 70910-900, Brasília-DF, Brazil;4. National Institute of Science and Technology for Complex Systems at Universidade de Brasília, FACE, CEP 70910-900, Brasília-DF, Brazil |
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| Abstract: | Many central banks have adopted explicit objectives for financial stability, raising the possibility of trade-offs between price and financial stability objectives. Based on structural vector autoregressions that incorporate both monetary and macroprudential policy shocks for four inflation targeting economies in Asia and the Pacific, we analyse the role of each policy shock in explaining deviations from the other policy’s objective, by applying historical decompositions. The macroprudential measures used in the study affect credit extended to the private sector. We find that there are periods when macroprudential policy shocks have contributed to pushing inflation away from the central bank’s inflation target and when monetary policy shocks have contributed to buoyant credit, suggesting that there have been short-term trade-offs between price and financial stability objectives. However, we also find periods when macroprudential policy shocks helped stabilise inflation and monetary policy shocks contributed to financial stability. |
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| Keywords: | Financial stability Price stability Macroprudential policy Monetary policy |
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