{
  "title": "IMF Survey : Monetary Policy Should Focus on Price Stability",
  "publication": "IMF News, September 21, 2015",
  "sourceUrl": "https://www.imf.org/en/news/articles/2015/09/28/04/53/sopol092115a",
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  "summary": "Monetary policy should stick to its core mandate of price stability, and should deviate from its traditional role only if the benefits to the economy outweigh the costs, according to a new study from the International Monetary Fund.",
  "publishDate": "2015-09-21",
  "sections": [
    {
      "heading": "Overview",
      "content": "- Publication date: September 21, 2015\n- Core message: Monetary policy should stick to its core mandate of price stability and deviate from that role only when benefits to the economy outweigh the costs.\n- Context: Study from the International Monetary Fund responding to concerns about mounting financial stability risks amid low interest rates and delayed policy tightening in advanced economies."
    },
    {
      "heading": "Framework proposed by the IMF study",
      "content": "- Three-step analytical framework:\n  - (i) understanding and quantifying the transmission mechanism from interest rates to financial stability;\n  - (ii) gauging the tradeoffs between price and financial stability;\n  - (iii) weighing the benefits and costs to the economy of leaning against the wind."
    },
    {
      "heading": "Key findings",
      "content": "- Link between interest rates and crisis probability:\n  - Hiking rates by 100 basis points for a year will eventually reduce the probability of crises by 0.04 to 0.3 percentage points at most.\n- Transmission channels:\n  - Interest rates affect crisis probabilities through quantities (leverage of financial firms, bank credit, bank risk-taking behavior) and prices (asset prices, especially real estate, and credit spreads).\n- Tradeoffs and costs:\n  - In many cases, the costs of a temporary rate hike outweigh the benefits because:\n    - Higher rates significantly raise unemployment in the short to medium term;\n    - Higher rates increase financial stability risks through lower growth, reduced net worth, and higher debt servicing costs;\n    - There may be costs to central bank credibility if inflation is undershot.\n  - Often financial risks develop during economic expansions when higher rates would already be justified by price and output stability."
    },
    {
      "heading": "Policy recommendations and implications",
      "content": "- Primary prescription:\n  - Monetary policy should generally stick to its core mandate of price stability and not lean against the wind based on current knowledge.\n- Prudential measures:\n  - Microprudential and macroprudential policies, capital and liquidity ratios, and regulation are the natural tools to prevent crises and support financial system resilience.\n- Monitoring and conditional deviations:\n  - Policymakers should closely monitor financial stability risks and not rule out higher interest rates while knowledge of the relationship between monetary policy and financial risks evolves.\n  - Deviations from traditional policy may be warranted in some circumstances, for example when the consequences of a crisis are expected to be especially severe."
    },
    {
      "heading": "Scenarios and caveats",
      "content": "- General assessment:\n  - Based on current evidence, the case for using monetary policy to contain risks to financial stability (leaning against the wind) appears weak in most circumstances.\n- Exceptions and evolving understanding:\n  - There are circumstances in which central banks may want to lean against mounting financial stability risks.\n  - The IMF stresses that more research is needed; the understanding of domestic, cross-border, and business-cycle channels is rapidly evolving.\n  - Future work should examine the complete policy set, including the benefits and costs of prudential policies and their interaction with monetary policy."
    },
    {
      "heading": "Research priorities and open questions",
      "content": "- Improve understanding of:\n  - How well microprudential and macroprudential policies work in practice;\n  - The full interaction between monetary policy and prudential regulation;\n  - Circumstances where monetary policy deviations produce beneficial anticipatory responses by investors.\n- The final verdict on the appropriate role for monetary policy in containing financial stability risks requires further empirical and policy analysis.\n\nSource: IMF Survey : Monetary Policy Should Focus on Price Stability (September 21, 2015).\n\n---\n\n Content in this bundle\n\n- 082815apdf (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\n References\n\n- https://www.imf.org/en/News/country-focus\n- PRESS CENTER\n- Policy\n- New era of monetary policy\n- What is monetary policy\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2015/09/28/04/53/sopol092115a"
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    "Published: September 21, 2015",
    "Publication date: September 21, 2015",
    "Core message: Monetary policy should stick to its core mandate of price stability and deviate from that role only when benefits to the economy outweigh the costs.",
    "Context: Study from the International Monetary Fund responding to concerns about mounting financial stability risks amid low interest rates and delayed policy tightening in advanced economies.",
    "Three-step analytical framework:",
    "Link between interest rates and crisis probability:",
    "Transmission channels:",
    "Tradeoffs and costs:",
    "Primary prescription:",
    "Prudential measures:",
    "Monitoring and conditional deviations:",
    "General assessment:",
    "Exceptions and evolving understanding:",
    "Improve understanding of:",
    "The final verdict on the appropriate role for monetary policy in containing financial stability risks requires further empirical and policy analysis.",
    "[082815apdf (PDF)](/-/media/websites/imf/imported/external/np/pp/eng/2015/_082815apdf.pdf){rel=\"external\" type=\"application/pdf\"}",
    "[https://www.imf.org/en/News/country-focus](https://www.imf.org/en/News/country-focus)",
    "[PRESS CENTER](http://presscenter.imf.org/)",
    "[Policy](https://www.imf.org/en/news/search)",
    "[New era of monetary policy](http://www.imf.org/external/pubs/ft/survey/so/2013/POL051613A.htm)",
    "[What is monetary policy](http://www.imf.org/external/pubs/ft/fandd/basics/monpol.htm)",
    "[https://www.imf.org/en/home](https://www.imf.org/en/home)"
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