IMF – Navigating Trade-Offs between Price and Financial Stability

The main theme of the document is the exploration of trade-offs between price and financial stability in times of high inflation.

Key findings include the potential use of central bank liquidity tools and other policies to support the fight against inflation while addressing financial stress issues. Challenges related to the application of these tools and specific country characteristics may limit central banks' ability to achieve both price and financial stability. In times of high financial stress, central banks should consider risks to economic activity, use monetary policy flexibility to slow inflation reduction, and communicate that deviations from the medium-term inflation target are temporary. Countries with low central bank credibility, high exchange rate dependence, and limited fiscal space face additional challenges and may rely on foreign exchange interventions, macroprudential policies, capital flow management measures, and international liquidity instruments.