Financial Stability and Optimal Interest-Rate Policy

Ajello, Andrea; Laubach, Thomas; López‐Salido, David; Nakata, Taisuke

doi:10.17016/feds.2016.067

Cited by 67 publications

(108 citation statements)

References 27 publications

(36 reference statements)

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“…2 We base our analysis Figure 1 shows the weighted average of the debt-to-income ratio across countries where weights are given by countries'shares of output. 4 In each quarter, the light grey area spans the range of values (minimum and maximum) across countries, while the dark shaded area delimits the 20th and 80th percentiles.…”

Section: Private Debtmentioning

confidence: 99%

Monetary Policy, Private Debt and Financial Stability Risks

Bauer

Granziera²

2016

SSRN Journal

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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. ii Terms of use: Documents in AbstractCan monetary policy be used to promote financial stability? We answer this question by estimating the impact of a monetary policy shock on private-sector leverage and the likelihood of a financial crisis. Impulse responses obtained from a panel VAR model of 18 advanced countries suggest that the debt-to-GDP ratio rises in the short run following an unexpected tightening in monetary policy. As a consequence, the likelihood of a financial crisis increases, as estimated from a panel logit regression. However, in the long run, output recovers and higher borrowing costs discourage new lending, leading to a deleveraging of the private sector. A lower debt-to-GDP ratio in turn reduces the likelihood of a financial crisis. These results suggest that monetary policy can achieve a less risky financial system in the long run but could fuel financial instability in the short run. We also find that the ultimate effects of a monetary policy tightening on the probability of a financial crisis depend on the leverage of the private sector: the higher the initial value of the debt-to-GDP ratio, the more beneficial the monetary policy intervention in the long run, but the more destabilizing in the short run. Bank topics: Monetary policy; Financial stability; Credit and credit aggregates; Transmission of monetary policy JEL codes: E; E52; E58; C21; C23 RésuméLa politique monétaire peut-elle aider à soutenir la stabilité financière? Pour répondre à cette question, nous estimons l'incidence qu'un choc de politique monétaire aurait sur le levier financier du secteur privé et sur la probabilité de voir survenir une crise financière. Les fonctions de réaction tirées du modèle vectoriel autorégressif sur données de panel utilisé pour 18 pays avancés tendent à montrer que le ratio de la dette au PIB augmente à court terme après un resserrement inattendu de la politique monétaire. L'éclatement d'une crise financière devient alors plus probable, comme l'indiquent les estimations du modèle de régression logit. Sur le long terme en revanche, la production se redresse, et la hausse du coût du crédit décourage de nouveaux emprunts, ce qui aboutit à une diminution du levier financier dans le secteur privé. La baisse du ratio de la dette au PIB rend l'éclatement d'une crise financière moins probable. Ces résultats semblent montrer que la politique monétaire permet de réduire les risques pour la stabilité du système financier sur le long terme, mais qu'...

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Section: Private Debtmentioning

confidence: 99%

Monetary Policy, Private Debt and Financial Stability Risks

Bauer

Granziera²

2016

SSRN Journal

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“…Ajello et al . () qualify this conclusion by examining different forms of uncertainty faced by Bayesian and robust policymakers. They show that it is optimal for monetary authorities to adjust their policy rate more aggressively to financial conditions if a crisis as severe as the Great Depression occurs, or if the probability of a crisis is highly responsive to financial conditions.…”

Section: Continued Challenges Regarding the Effectiveness Of Macroprumentioning

confidence: 95%

What Do We Know About the Effects of Macroprudential Policy?

2017

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The literature on the effectiveness of macroprudential policy tools is still in its infancy and has so far provided only limited guidance for policy decisions. In recent years, however, increasing efforts have been made to fill this gap. Progress has been made in embedding macroprudential policy in theoretical models. There is increasing empirical work on the effect of some macroprudential tools on a range of target variables, such as quantities and prices of credit, asset prices, and on the amplitude of the financial cycle and financial stability. In this paper we provide a critical review of recent progress in theoretical and empirical research on the effectiveness of macroprudential instruments.

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“…Financial wealth can provide an alternative route to generate macro…nancial linkages (Vitek, 2017). 4 Alternative approaches include non-linear modelling (Brunnermeier and Sannikov, 2014;Ajello et al, 2016) and general equilibrium models that are not dynamic and stochastic (Goodhart et al, 2013;Cesa-Bianchi and Rebucci, 2017 The bank-based models (to which our paper belongs) highlight various types of channels through which monetary policy a¤ects the …nancial sector: through the incentives of banks to monitor (Dell'Ariccia, Laeven and Marquez, 2014); the screening of borrowers by banks (Dell'Ariccia and Marquez, 2006); the skewness of bank returns (Valencia, 2014); the impact on information asymmetries (Loisel, Pommeret and Portier, 2012;Drees, Eckwert and Várdy, 2013;Dubecq, Mojon and Ragot, 2015); the incentives of bank loan o¢ cers or asset managers whose incentives deviate from pro…t maximization (Acharya and Naqvi, 2012;Morris and Shin, 2016); the impact on nominal contracts between banks and creditors that cannot be made state-contingent (Allen, Carletti and Gale, 2014); and moral hazard when policy rates are used as a bailout mechanism (Diamond and Rajan, 2012;Farhi and Tirole, 2012).…”

Section: Related Literaturementioning

confidence: 99%

Will macroprudential policy counteract monetary policy’s effects on financial stability?

Agur

Demertzis

2019

The North American Journal of Economics and Finance

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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. Terms of use: Documents in EconStor may be saved and copied for your personal and scholarly purposes. You are not to copy documents for public or commercial purposes, to exhibit the documents publicly, to make them publicly available on the internet, or to distribute or otherwise use the documents in public. If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence.

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Financial Stability and Optimal Interest-Rate Policy

Cited by 67 publications

References 27 publications

Monetary Policy, Private Debt and Financial Stability Risks

Monetary Policy, Private Debt and Financial Stability Risks

What Do We Know About the Effects of Macroprudential Policy?

Will macroprudential policy counteract monetary policy’s effects on financial stability?

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