Monetary and financial stability in the euro area: Pro-cyclicality versus trade-offBrigitte Evelyne Granville () and Sushanta K. Mallick () Journal of International Financial Markets, Institutions and Money, 2009, vol. 19, issue 4, pages 662-674 Abstract: This paper investigates the nexus between monetary stability and financial stability. We examine, in the experience of EMU between 1994 and 2008, first, the response of the term structure of interest rates, share prices, exchange rates, property price inflation and the deposit-loan ratio of the banking sector (our proxies for financial stability) to changes in the consumer price level and ECB policy rate (our proxies for monetary stability); second, whether and to what extent lower inflation has caused share price stability and how ECB policy rate has reacted to inflation. Using a sign-restriction-based VAR approach, we find that there is a pro-cyclical relationship between monetary and financial stability in the long-run. With a positive inflation shock, we find on average a 2% estimated decline in share prices. This suggests that the interest rate instrument used for inflation targeting is conducive to financial stability. Keywords: Monetary; stability; Financial; stability; Monetary; policy; EMU; VAR; sign; restriction (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: http://EconPapers.repec.org/RePEc:eee:intfin:v:19:y:2009:i:4:p:662-674 Access Statistics for this article Journal of International Financial Markets, Institutions and Money is edited by I. Mathur and C. J. Neely More articles in Journal of International Financial Markets, Institutions and Money from Elsevier |
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