Staff Discussion Notes

Navigating Trade-Offs between Price and Financial Stability in Times of High Inflation

By Romain Bouis, Damien Capelle, Giovanni Dell'Ariccia, Christopher J. Erceg, Maria Soledad Martinez Peria, Mouhamadou Sy, Ken Teoh, Jerome Vandenbussche

April 11, 2025

Download PDF More Formats on IMF eLibrary Order a Print Copy
More formats on IMF eLibrary Order a Print Copy

Preview Citation

Format: Chicago

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 April 13, 2025, https://doi.org/10.5089/9798229005135.006

Export Citation

  • ProCite
  • RefWorks
  • Reference Manager
  • BibTex
  • Zotero
  • EndNote

Disclaimer: This Staff Discussion Note represents the views of the authors and does not necessarily represent IMF views or IMF policy. The views expressed herein should be attributed to the authors and not to the IMF, its Executive Board, or its management. Staff Discussion Notes are published to elicit comments and to further debate.

Summary

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. However, challenges in deploying these tools and specific country characteristics may hinder central banks’ ability to achieve both price and financial stability. In such circumstances, central banks should account for financial stress increasing downside risks to activity, allow for slower disinflation using monetary policy flexibility, and communicate that deviations from the medium-term inflation target are temporary. Countries with weak central bank credibility, high exposure to exchange rate movements, and limited fiscal space face extra challenges in managing these trade-offs and might have to rely on foreign exchange interventions, macroprudential policies, capital flow measures, and international liquidity tools.

Subject: Asset and liability management, Central bank policy rate, Financial institutions, Financial sector policy and analysis, Financial sector risk, Financial sector stability, Financial services, Inflation, Inflation targeting, Liquidity, Monetary policy, Monetary tightening, Nonbank financial institutions, Price stabilization, Prices

Keywords: Central bank policy rate, Financial sector risk, Financial sector stability, Financial Stability, Global, Inflation, Inflation targeting, Interest rate policy, Liquidity, Macroprudential policy, Monetary Policy, Monetary tightening, Nonbank financial institutions, Policy Coordination, Price stabilization

Publication Details

You May Also Be Interested In...

Principality of Andorra: 2025 Article IV Consultation-Press Release; and Staff Report

April 11, 2025

Determinants of Sovereign Spreads in The Bahamas: Bahamas

April 11, 2025

Morocco: Request for an Arrangement Under the Flexible Credit Line and Cancellation of Current Arrangement-Press Release; Staff Report; and Statement by the Executive Director for Morocco

April 11, 2025

Assessing Climate Change Risks: Potential Output Losses and Gains from Strengthening Resilience, Bahamas

April 11, 2025