New Economics Findings from Princeton University Outlined (When Monetary Policy for Financial Stability Backfires: Communication With Strategic Banks): Economics

2026 OCT 19 (NewsRx) -- By a News Reporter-Staff News Editor at Economics Daily Report -- Fresh data on Economics are presented in a new report. According to news originating from Princeton, New Jersey, by NewsRx correspondents, research stated, “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.”

Our news journalists obtained a quote from the research from Princeton University, “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.”

According to the news editors, the research concluded: “Paradoxically, even banks may prefer such a central banker when the benefits of more credible guidance outweigh the loss of policy influence.”

This research has been peer-reviewed.

For more information on this research see: When Monetary Policy for Financial Stability Backfires: Communication With Strategic Banks. Journal of Economic Theory, 2026;237. Journal of Economic Theory can be contacted at: Academic Press Inc Elsevier Science, 525 B St, Ste 1900, San Diego, CA 92101-4495, USA. (Elsevier - www.elsevier.com; Journal of Economic Theory - http://www.journals.elsevier.com/journal-of-economic-theory/)

The news correspondents report that additional information may be obtained from Giampaolo Bonomi, Princeton University, 001 Fisher Hall, Princeton, NJ 08544, United States.

The direct object identifier (DOI) for that additional information is: https://doi.org/10.1016/j.jet.2026.106253. This DOI is a link to an online electronic document that is either free or for purchase, and can be your direct source for a journal article and its citation.

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