Monetary Policy and Cyclical Systemic Risk - Friends or Foes?

Abstract

We explore the procyclicality of monetary policy decisions towards the financial cycle in the 1995−2015 period on a sample of seven central banks. Using the real interest rate gap and the credit-to-GDP gap, we provide evidence that monetary policy procyclicality is a material issue occurring in more than 50% of observations in expansionary phase of financial cycle. It indicates that the central bank faces conflicting objectives of price and financial stability (as proxied by cyclical systemic risk). Nevertheless, taking into consideration all financial cycle phases, complementariness between price and financial stability is more frequent than cases with conflicting objectives in the UK, Euro Area and the US. The occurrence of potential procyclical behaviour of monetary policy (especially in the financial cycle expansion phases) underlines the need for proactive macroprudential policy.

Are interest rate changes comoving with financial cycle?

“…The paper further refines the methodology proposed in Kurowski -Smaga (2018) by introducing significant expansions, as we i) use a much larger country sample, ii) deploy fourinstead of one -financial cycle indicators, and iii) calculate the monetary procyclicality ratio in twoinstead of oneversions.…”

“…We try to empirically explore potential instances of such conflicts between achieving price stability and stabilizing the financial cycle, as did Malovan a -Frait (2016). We follow the approach in Kurowski -Smaga (2018), specifically, for each quarter we compare the level of current inflation rate (above or below the numerical inflation target) with the current phase of the credit/GDP cycle for that quarter, and thus, identify the type of relation between the monetary and macroprudential policy objectives (conflicting/neutral/complementary). 9 Lastly, we calculate the share of quarters in the total sample with different types of interactions between Table 3.…”

“…Second, we use the monetary policy procyclicality ratio (MPP), basing on a dynamic approach proposed by Kurowski -Smaga (2018).…”

“…when monetary policy is procyclical in quarter t 0; otherwise In the end, the MPP simply shows the share of quarters in the whole sample period when monetary policy is procyclical. As indicated above, monetary policy is deemed procyclical only in Source: Own work based on Kurowski -Smaga (2018).…”

Cash Concentration and Liquidity Policy

“…The process of transferring funds among subsidiaries may be especially easy when all the multinational corporation´s subsidiaries use branches of the same bank. [11,12] A communications network allows the multinational corporation to make the best use of each subsidiary cash, which reduce the amount of external financing needed and reduce the multinational corporation´s exchange rate risk.…”