“…Using content analysis for the Fed's monetary policy discussions from 1991 to 2013, Oet, Ong, and Dooley () find that U.S. monetary policy has evolved over time and responds to additional factors beyond output and inflation.…”
mentioning
confidence: 99%
“…Hence, this dimension also accounts for the channel through which Peek, Rosengren, and Tootell () and Oet, Ong, and Dooley () consider financial stability risks to play a role in the monetary policy decision.…”
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AbstractCentral banks may face challenges in achieving their price stability goals when financial stability risks are present. There is, however, considerable heterogeneity among central banks with respect to how they manage these potential trade-offs. In this paper, we review the institutional and operational policy frameworks of ten central banks in major advanced economies and then assess the effect of financial stability risks on their monetary policy decisions according to these frameworks. To do so, we construct a timevarying financial stability orientation (FSO) index that quantifies a central bank's policy orientation with respect to financial stability that spans the major viewpoints of the literature: "leaning against the wind" versus "cleaning up after the crash." The index encompasses three dimensions: (i) the nature of the statutory frameworks, (ii) the extent of the regulatory tool kit, and (iii) the prominence of financial stability references in central bank monetary policy statements. We then include our FSO index in a modified Taylor rule, which is estimated using a cross-country panel of up to ten central banks for the period from 2000Q1 to 2014Q4. We find that in episodes of high financial stability risks, measured by a strongly positive credit to GDP gap, "leaning-type" central banks, i.e., those with a high FSO index value, appear to account for financial stability considerations in their monetary policy rate decisions. For "cleaning-type" central banks, we do not find this to be the case. Our baseline specification suggests that a representative leaning-type central bank's policy rate is about 0.3 percentage points higher when financial stability risks are present than the policy rate of a representative cleaning-type central bank. We also find that the strength of this response increases in the additional presence of a house price boom but not so for the simultaneous occurrence of an equity price boom.
JEL classification: E5, E4, G01 Bank classification: Monetary policy framework; Financial stability; International topicsRésumé L'atteinte des objectifs des banques centrales en matière de stabilité des prix peut présenter des défis lorsque des risques pèsent sur la stabilité financière. Les banques centrales gèrent toutefois très différemment les unes des autres les arbitrages potentiels qui découlent de ces deux pôles. Dans cette étude, nous examinons les cadres de politique institutionne...
“…Using content analysis for the Fed's monetary policy discussions from 1991 to 2013, Oet, Ong, and Dooley () find that U.S. monetary policy has evolved over time and responds to additional factors beyond output and inflation.…”
mentioning
confidence: 99%
“…Hence, this dimension also accounts for the channel through which Peek, Rosengren, and Tootell () and Oet, Ong, and Dooley () consider financial stability risks to play a role in the monetary policy decision.…”
Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. iii
Terms of use:
Documents in EconStor may
AbstractCentral banks may face challenges in achieving their price stability goals when financial stability risks are present. There is, however, considerable heterogeneity among central banks with respect to how they manage these potential trade-offs. In this paper, we review the institutional and operational policy frameworks of ten central banks in major advanced economies and then assess the effect of financial stability risks on their monetary policy decisions according to these frameworks. To do so, we construct a timevarying financial stability orientation (FSO) index that quantifies a central bank's policy orientation with respect to financial stability that spans the major viewpoints of the literature: "leaning against the wind" versus "cleaning up after the crash." The index encompasses three dimensions: (i) the nature of the statutory frameworks, (ii) the extent of the regulatory tool kit, and (iii) the prominence of financial stability references in central bank monetary policy statements. We then include our FSO index in a modified Taylor rule, which is estimated using a cross-country panel of up to ten central banks for the period from 2000Q1 to 2014Q4. We find that in episodes of high financial stability risks, measured by a strongly positive credit to GDP gap, "leaning-type" central banks, i.e., those with a high FSO index value, appear to account for financial stability considerations in their monetary policy rate decisions. For "cleaning-type" central banks, we do not find this to be the case. Our baseline specification suggests that a representative leaning-type central bank's policy rate is about 0.3 percentage points higher when financial stability risks are present than the policy rate of a representative cleaning-type central bank. We also find that the strength of this response increases in the additional presence of a house price boom but not so for the simultaneous occurrence of an equity price boom.
JEL classification: E5, E4, G01 Bank classification: Monetary policy framework; Financial stability; International topicsRésumé L'atteinte des objectifs des banques centrales en matière de stabilité des prix peut présenter des défis lorsque des risques pèsent sur la stabilité financière. Les banques centrales gèrent toutefois très différemment les unes des autres les arbitrages potentiels qui découlent de ces deux pôles. Dans cette étude, nous examinons les cadres de politique institutionne...
“…In focusing on the interactions of U.S. monetary policy with financial stability, our paper is related to recent work by Peek et al (2016) and Oet and Lyytinen (2017). These papers both argue that U.S. monetary policy before 2008 already acted in a manner consistent with having financial stability as an additional mandate.…”
This paper retraces how financial stability considerations interacted with U.S. monetary policy before and during the Great Recession. Using text-mining techniques, we construct indicators for financial stability sentiment expressed during testimonies of four Federal Reserve Chairs at Congressional hearings.Including these text-based measures adds explanatory power to Taylor-rule models. In particular, negative financial stability sentiment coincided with a more accommodative monetary policy stance than implied by standard Taylorrule factors, even in the decades before the Great Recession. These findings are consistent with a preference for monetary policy reacting to financial instability rather than acting pre-emptively to a perceived build-up of risks.JEL classifications: E52, E58, N12
“…On the other hand, we relate to works that analyse official reports and documents to assess whether the Fed takes into account financial factors. Oet and Lyytinen (2017) and Peek, Rosengren, and Tootell (2016) find that discussing financial stability in FOMC meetings affects policy decisions, Wischnewsky, Jansen, and Neuenkirch (2019) reinforce this evidence analysing congressional hearings of Fed Chairmen. We restrict our focus to liquidity factors because QE injections addressed this specific issue through bal-ance sheet expansions.…”
We study the parameter instability in the monetary policy rule followed by the US Federal Reserve Bank since WWII. We find evidence across a variety of econometric methods of fundamental instability, in particular on the parameter governing the reaction to inflation expectations -the Taylor Principle. We augment the monetary policy rule to account for liquidity conditions and find consistent violations of the Taylor Principle without sunspot inflation episodes. We study the presence of multiple regimes and find that when uncertainty and economic slowdown are looming the Fed reacts passively to expected inflation. * I thank seminar participants at PSE Macro Workshop, 2019 GDRe Symposium in Besançon and 5 th IMAC workshop. H. Bennani and G. l'Oeillet provided excellent discussion. I wish to thank F. Coricelli and J-B. Chatelain for invaluable guidance. I also wish to thank M. Ranaldi, I. Iodice, J. Montana, and F. Ceron for fruitful conversations. All errors remain my own.
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