Keep your friends close and your enemies closer – the case of monetary policy and financial imbalances

Małgorzata Iwanicz-Drozdowska and Kurowski Łukasz ()
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Kurowski Łukasz: 49670 SGH Warsaw School of Economics, al. Niepodległości 162, 02-554 Warsaw, Poland

German Economic Review, 2021, vol. 22, issue 4, 383-414

Abstract: The global financial crisis (GFC) has shown that monetary policy focused on a stable price level may negatively affect the stability of the financial system. Therefore, achieving price and financial stability using interest rates as the main tool is difficult. In this paper, we analyse how often monetary policy strengthened imbalances in the financial system in 20 countries from 1999Q1 to 2020Q2. To this end, we compare monetary policy stance with a novel financial imbalance index (FII). We find that monetary policy is material in aggravating financial imbalances mostly in Eurozone countries. We attribute this finding to the ECB’s “too loose, too long” monetary policy and to difficulties with applying single monetary policies in countries with different economic conditions and in different phases of credit and financial cycles. Our results point to a need for a proactive macroprudential policy in the environment of low interest rates.

Keywords: monetary policy; financial imbalances; financial cycle; low interest rates (search for similar items in EconPapers)
JEL-codes: E37 E52 E58 E61 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (1)

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DOI: 10.1515/ger-2020-0045

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