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

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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 26, 2025, https://doi.org/10.5089/9798229005135.006

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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, Financial sector policy and analysis, Financial sector stability, Inflation, Liquidity, Price stabilization, Prices

Keywords: Asset purchase, Financial sector stability, Financial Stability, Global, Inflation, Liquidity, Liquidity from the discount window, Monetary Policy, Monetary policy flexibility, Monetary policy tightening, Policy Coordination, Price stabilization, Resolution framework

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