This means not only that monetary policy might become less effective in achieving price stability, but also that it could have perverse effects on financial stability itself. I will consider two cases. The first case occurs when the market turmoil has been caused by excess debt accumulation by households and firms, as a result of very low interest rates over a long period.
These authors show that combining financial and macroeconomic elements in a single model permits better forecasts of both GDP and of interest rates than can be achieved through less formal methods.11 Other work, for example by Ang and Bekaert (2003), shows how modeling the links between interest rates and the economy may help us obtain more efficient forecasts of inflation.