Research

This paper extends the financial conditions index (FCI) targeting framework to analyze optimal dual-instrument monetary policy. Building on Caballero and Simsek’s theoretical model, I demonstrate how central banks can achieve first-best macroeconomic outcomes by jointly deploying interest rates and central bank asset purchases (CBAP). The analysis shows that coordinated use of both instruments allows policymakers to simultaneously target aggregate demand and financial conditions, addressing market frictions more effectively than single-instrument regimes. Theoretical derivations establish conditions under which the dual-instrument approach dominates conventional monetary policy, with implications for central bank toolkit design in modern financial markets.