We examine whether the systematic response of monetary policy to financial imbalances matters for financial stability. We measure how responsive the Federal Reserve's policy is to imbalances in the equity, housing and credit markets. We find that changes in these policy sensitivities predict the subsequent development of financial imbalances. When monetary policy responds more counter-cyclically to market overheating, imbalances tend to decline over time. This effect is distinct from that of current and anticipated interest rate levels – the risk-taking channel. The evidence highlights the importance of the systematic component of monetary policy reaction function in shaping the financial cycle.

We investigate whether the dynamic response of aggregate consumption to monetary policy depends on the distribution of household debt relative to income. Using U.K. loan-level microdata, we propose a novel approach to isolate the fraction of households with a limited ability to smooth consumption. By exploiting time and cross-sectional variation, we show that consumption responds more to monetary policy when the share of highly indebted households is large, but find no state contingency with respect to the overall level of debt-to-income. Our results highlight the role of household heterogeneity for understanding monetary transmission to aggregate consumption.

This paper aims at investigating first, the (possibly time-varying) empirical relationship between price and financial stability, and second, the effects of some macro and policy variables on this relationship in the United States and the Eurozone. Three empirical methods are used to examine the relevance of A.J. Schwartz's “conventional wisdom” that price stability would yield financial stability. Using simple correlations and VAR and Dynamic Conditional Correlations, we reject the hypotheses that price stability is positively correlated with financial stability and that the correlation is stable over time. The latter result and the analysis of the determinants of the link between price stability and financial stability cast some doubt on the appropriateness of the “leaning against the wind” monetary policy approach.