The paper documents models used to analyse the interactions and trade-offs between price and financial stability at the European Central Bank. The paper describes a simple conceptual framework to think about the short- and medium-term trade-offs between price and financial stability. Short-term trade-offs arise whenever current inflationary pressure is high, but the financial system is experiencing stress. Medium-term trade-offs arise whenever current inflationary pressure is low, but risk is building up in the financial system. We document four main sets of models used to quantify trade-offs: time series models, balance sheet models, credit risk models and DSGE models with banking and financial frictions.
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