## IMF Survey : Monetary Policy Should Focus on Price Stability

_IMF News, September 21, 2015_

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**Canonical URL:** [IMF Survey : Monetary Policy Should Focus on Price Stability](https://www.imf.org/en/news/articles/2015/09/28/04/53/sopol092115a)

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## Bibliographic details
- Published: September 21, 2015

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### Overview
- 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.

### Framework proposed by the IMF study
- Three-step analytical framework:
  - (i) understanding and quantifying the transmission mechanism from interest rates to financial stability;
  - (ii) gauging the tradeoffs between price and financial stability;
  - (iii) weighing the benefits and costs to the economy of leaning against the wind.

### Key findings
- Link between interest rates and crisis probability:
  - 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.
- Transmission channels:
  - 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).
- Tradeoffs and costs:
  - In many cases, the costs of a temporary rate hike outweigh the benefits because:
    - Higher rates significantly raise unemployment in the short to medium term;
    - Higher rates increase financial stability risks through lower growth, reduced net worth, and higher debt servicing costs;
    - There may be costs to central bank credibility if inflation is undershot.
  - Often financial risks develop during economic expansions when higher rates would already be justified by price and output stability.

### Policy recommendations and implications
- Primary prescription:
  - Monetary policy should generally stick to its core mandate of price stability and not lean against the wind based on current knowledge.
- Prudential measures:
  - Microprudential and macroprudential policies, capital and liquidity ratios, and regulation are the natural tools to prevent crises and support financial system resilience.
- Monitoring and conditional deviations:
  - 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.
  - Deviations from traditional policy may be warranted in some circumstances, for example when the consequences of a crisis are expected to be especially severe.

### Scenarios and caveats
- General assessment:
  - 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.
- Exceptions and evolving understanding:
  - There are circumstances in which central banks may want to lean against mounting financial stability risks.
  - The IMF stresses that more research is needed; the understanding of domestic, cross-border, and business-cycle channels is rapidly evolving.
  - Future work should examine the complete policy set, including the benefits and costs of prudential policies and their interaction with monetary policy.

### Research priorities and open questions
- Improve understanding of:
  - How well microprudential and macroprudential policies work in practice;
  - The full interaction between monetary policy and prudential regulation;
  - Circumstances where monetary policy deviations produce beneficial anticipatory responses by investors.
- The final verdict on the appropriate role for monetary policy in containing financial stability risks requires further empirical and policy analysis.

*Source: IMF Survey : Monetary Policy Should Focus on Price Stability (September 21, 2015).*

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## References

- [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)

_Source: https://www.imf.org/en/news/articles/2015/09/28/04/53/sopol092115a_