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@article{Bonomi:2026:10.1016/j.jet.2026.106253,
author = {Bonomi, G and Uppal, A},
doi = {10.1016/j.jet.2026.106253},
journal = {Journal of Economic Theory},
title = {When monetary policy for financial stability backfires: communication with strategic banks},
url = {http://dx.doi.org/10.1016/j.jet.2026.106253},
volume = {237},
year = {2026}
}
TY - JOUR
AB - We develop a model in which the central bank incorporates financial stability concerns into its monetary policy and communication decisions, while systemic banks strategically choose portfolios to influence policy. Because fully responding to economic shocks would generate policy surprises that threaten bank stability, the central bank underreacts to those shocks, consistent with the Federal Reserve’s response during the 2023 banking crisis. Anticipating this accommodation, banks tilt their portfolios to increase the financial-stability costs of rate hikes, pulling monetary policy toward lower rates while giving the central bank an incentive to announce higher future rates than it expects to set. Financial stability concerns can therefore backfire, creating a novel responsiveness–credibility trade-off: the more the central bank accommodates banks’ exposures ex post, the less credible its forward guidance becomes ex ante, making it harder for banks to align their portfolios with future policy and leaving them more exposed to policy surprises. Even when society values financial stability, it benefits from appointing a central banker who places less weight on it. Paradoxically, even banks may prefer such a central banker when the benefits of more credible guidance outweigh the loss of policy influence.
AU - Bonomi,G
AU - Uppal,A
DO - 10.1016/j.jet.2026.106253
PY - 2026///
SN - 0022-0531
TI - When monetary policy for financial stability backfires: communication with strategic banks
T2 - Journal of Economic Theory
UR - http://dx.doi.org/10.1016/j.jet.2026.106253
UR - https://doi.org/10.1016/j.jet.2026.106253
VL - 237
ER -