Monetary Policy Tradeoffs Between Financial Stability and Price Stability /

We analyze the impact of interest rate policy on Önancial stability in an environment where banks can experience runs on their short-term liabilities forcing them to sell assets at Öre sale prices. Price adjustment frictions and a state-dependent risk of Önancial crisis create the possibility of a policy tradeo§ between price stability and Önancial stability. Focusing on Taylor rules with monetary policy possibly reacting to banksí short-term liabilities, we Önd that the optimized policy uses the extra tool to support investment at the expense of higher ináation and output volatility