||The project reflects the problems that have arisen after the recent financial crisis when a connection between monetary policy and financial stability has begun to be investigated. The first purpose of this project is to find whether direct incorporation of the financial variables in the monetary policy rule can bring macroeconomic benefits in terms of lower volatility of inflation and output. The second outcome should answer a question whether financial variables can bring useful information for the setting of the policy rate and what is their role in the context of interconnection between monetary policy and financial stability. This work is theoretical. Two DSGE models with a financial sector and financial imbalances will be constructed. The models will be calibrated, estimated and assessed qualitatively and quantitatively. The problems specified in this proposal will be answered using the simulations. The result of this project will be a publication of two papers in international journals. In 2017-2018, the working papers that will be advanced to the IES WP series will be written. Subsequently, all the comments will be incorporated and the publications will be finalised such that they can be advanced to the review process of international journals and published in 2019.