The Andrew Crockett Memorial Lecture, delivered by Professor Jeremy C Stein (Moise Y Safra Professor of Economics, Harvard University), on the occasion of the Bank's Annual General Meeting, Basel, 25 June 2023.
Recent research has found that monetary policy works in part by influencing the risk premiums on both traded financial-market securities and intermediated loans. Research has also shown that, when risk premiums are compressed, there is an increased likelihood of a reversal that damages the credit-supply mechanism and the real economy. Together these effects create an intertemporal trade-off for monetary policy, as stimulating the economy today can sow the seeds of a future downturn that might be difficult to offset. I draw out some implications of this trade-off for the conduct of monetary policy.
Based on paper: Monetary Policy When the Central Bank Shapes Financial-Market Sentiment, Journal of Economic Perspectives, winter 2023.