Central banks in small open economies that try to target both financial stability and monetary policy using only one instrument may end up making credit shocks worse, according to a working paper published today by the National Bank of Belgium.

In Household and firm leverage, capital flows and monetary policy in a small open economy, author Mara Pirovano develops a model of a small open economy with a high level of dollarisation that faces a capital inflow shock, mimicking the experience of many