Such shocks will tend to muddy our sense of policy effectiveness and how we react in this environment. The possibility of over-tightening is clearly real, but central banks can also rectify their stance more quickly than in the event where they ‘under-tighten’. At this point in my story, it becomes hard to dodge the problems associated with financial institutions and financial stability more broadly.
While most central banks will move quickly to cordon off financial stability concerns from monetary policy where a trade-off emerges, the neatness of this will always be suspect. There will always be a more or less constant second-guessing of the monetary stance where tightening needs to happen, leading to market volatility. More fundamentally, does the existence of such a trade-off undermine price stability?