Navigating Trade-Offs between Price and Financial Stability in Times of High Inflation
Staff Discussion Notes, April 11, 2025
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- Navigating Trade-Offs between Price and Financial Stability in Times of High Inflation
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Bibliographic details
- Authors: Romain Bouis, Damien Capelle, Giovanni Dell'Ariccia, Christopher J. Erceg, Maria Soledad Martinez Peria, Mouhamadou Sy, Ken Teoh, Jerome Vandenbussche
- Published: April 11, 2025
- Series: Staff Discussion Notes
- DOI: https://doi.org/10.5089/9798229005135.006
Key findings
- Trade-offs between price and financial stability can occur when inflation is above target and financial stress is rising.
- Use of central bank liquidity tools and other financial stability policies may, under some circumstances, allow central banks to maintain their inflation fighting stance while addressing financial stress.
- Challenges in deploying liquidity tools and specific country characteristics may hinder central banks’ ability to achieve both price and financial stability.
- Financial stress increases downside risks to activity, which should be accounted for by policymakers.
- Central banks can allow for slower disinflation using monetary policy flexibility, provided deviations from the medium-term inflation target are communicated as temporary.
Policy recommendations and operational considerations
- Deploy central bank liquidity tools and financial stability policies where feasible to address financial stress without reversing monetary policy tightening.
- Allow for monetary policy flexibility to permit slower disinflation when financial stress materially increases downside risks to activity.
- Communicate clearly that any deviations from the medium-term inflation target are temporary to preserve credibility.
- Where central bank tools are constrained, rely on complementary policies:
- foreign exchange interventions,
- macroprudential policies,
- capital flow measures,
- international liquidity tools.
Country-specific constraints and elevated risks
- Countries with weak central bank credibility face extra challenges in managing trade-offs between price and financial stability.
- High exposure to exchange rate movements increases difficulty in preserving both price and financial stability.
- Limited fiscal space constrains policy options and may necessitate reliance on external or non-monetary tools.
Context, scope, and metadata
- Authors: Romain Bouis, Damien Capelle, Giovanni Dell'Ariccia, Christopher J. Erceg, Maria Soledad Martinez Peria, Mouhamadou Sy, Ken Teoh, Jerome Vandenbussche
- Publication date: April 11, 2025
- Series: Staff Discussion Notes No. 2025/003
- Issue: 003
- Volume: 2025
- Pages: 50
- DOI: https://doi.org/10.5089/9798229005135.006
- Stock No: SDNEA2025003
- ISBN: 9798229005135
- ISSN: 2617-6750
- Subjects: Asset and liability management; Financial sector policy and analysis; Financial sector stability; Inflation; Liquidity; Price stabilization; Prices
- Keywords: asset purchase; Financial sector stability; Financial Stability; Global; Inflation; Liquidity; liquidity from the discount window; Monetary Policy; monetary policy flexibility; monetary policy tightening; Policy Coordination; Price stabilization; resolution framework
- Citation preview (format: Chicago) included on the landing page: Romain Bouis, Damien Capelle, Giovanni Dell'Ariccia, Christopher J. Erceg, Maria Soledad Martinez Peria, Mouhamadou Sy, Ken Teoh, and Jerome Vandenbussche. "Navigating Trade-Offs between Price and Financial Stability in Times of High Inflation", Staff Discussion Notes 2025, 003 (2025), accessed 8/28/2026, https://doi.org/10.5089/9798229005135.006
Staff Discussion Note overview: "Navigating Trade-Offs between Price and Financial Stability in Times of High Inflation", Staff Discussion Notes No. 2025/003 (April 11, 2025).
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- Staff Discussion Note