Financial stability considerations for monetary policy at the European Central Bank: conceptual framework and quantitative tools

Authors:
  • UAUgo Albertazzi
    Ugo Albertazzi
  • PBPaul Bochmann
    Paul Bochmann
  • MBMiguel Boucinha
    Miguel Boucinha
  • CCCyril Couaillier
    Cyril Couaillier
  • DDDaniel Dieckelmann
    Daniel Dieckelmann
  • SFStephan Alexander Fahr
    Stephan Alexander Fahr
  • FFFinn Faber
    Finn Faber
  • JFJuan Manuel Figueres
    Juan Manuel Figueres
  • MFMarco Forletta
    Marco Forletta
  • AGAlberto Grassi
    Alberto Grassi
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Abstract
The paper documents models used to analyse the interactions and trade-offs between price and financial stability at the European Central Bank. The paper describes a simple conceptual framework to think about the short- and medium-term trade-offs between price and financial stability. Short-term trade-offs arise whenever current inflationary pressure is high, but the financial system is experiencing stress. Medium-term trade-offs arise whenever current inflationary pressure is low, but risk is building up in the financial system. We document four main sets of models used to quantify trade-offs: time series models, balance sheet models, credit risk models and DSGE models with banking and financial frictions.