Monetary Policy, Inflation, and Crises: New Evidence from History and Administrative Data

Björn Richter, Dmitry Kuvshinov, Gabriel Jiménez and José-Luis Peydró
Authors registered in the RePEc Author Service: Gabriel Jimenez and Jose-Luis Peydro

No 1378, Working Papers from Barcelona School of Economics

Abstract: We show that a U-shaped monetary rate path increases banking crisis risk, via credit and asset price cycles, analyzing 17 countries over 150 years. Monetary rate hikes (raw or instrumented using the international finance's trilemma) materially increase crisis risk, but only if rates were previously cut (or low) for long. Differently, non-crisis recessions are associated with rate hikes but no U. Regarding the mechanism, rate cuts in the first half of the U increase the likelihood of vulnerable "red zones" of high credit and asset prices, while subsequent rate hikes within "red zones" tend to trigger crises. U-shaped monetary rates are also associated with boom-bust dynamics in bank stock returns and profits (in long-run data), and with higher loan defaults, especially for ex-ante riskier borrowers and banks (in post-1995 administrative data for Spain). Overall, results suggest that monetary policy dynamics are crucial for financial stability.

Keywords: monetary policy; financial stability; banks; credit; asset prices; banking crises; macro-finance (search for similar items in EconPapers)
JEL-codes: E44 E51 E52 G01 G12 G21 (search for similar items in EconPapers)
Date: 2022-12
New Economics Papers: this item is included in nep-ban, nep-cba, nep-eec, nep-fdg, nep-his and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Related works:
Working Paper: Monetary policy, inflation, and crises: New evidence from history and administrative data (2023)
Working Paper: Monetary policy, inflation, and crises: New evidence from history and administrative data (2022)
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