Unconventional policy is best response to financial shocks – ECB paper


ECB headquarters

The ECB’s Frankfurt headquarters

Central bankers should use unconventional monetary policy measures in response to adverse financial shocks, a working paper from the European Central Bank says.

In (Un)conventional policy and the effective lower bound, Fiorella De Fiore and Oreste Tristani present a model where banks must pay monitoring costs, which are “subject to stochastic shocks over time”, to audit their borrowers. 

Adverse financial shocks raise costs for banks of monitoring lenders, which in turn increases lending rates

Original Source