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Given this the consequences of policy for financial

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Unformatted text preview: r is a natural consequence of looser monetary policy because of the effects of higher incomes on loan demand and supply, shown in Figure 2A. Other, more complex mechanisms, mechanisms, such as the model of misperception of risk by the funders of intermediaries diaries proposed by Dubecq, Mojon, and Ragot (2009) can make this effect even stronger. Given this, the consequences of policy for financial stability need to be considered in making interest-rate decisions, alongside the consequences of policy for for aggregate economic activity and inflation. The The nature of this consideration should not be completely symmetrical: marginal adjustments of interest rates always have consequences for output and inflation, while they will have nonnegligible consequences for the risk of financial instability only at certain times when the leverage is extreme enough for even small changes in asset values to have substantial effects on intermediary capital. Improved regulation and/or macroprudential supervision could further reduce the range of circumstances circumstances in which this consideration would matter for monetary policy decisions; sions; and this would be desirable, if possible, as freeing monetary policy to focus solely on output and inflation stabilization should allow those goals to...
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