Implications of the design of monetary policy for financial stability

Alicia Garcia Herrero () and Pedro del Río López
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Pedro del Río López: Banco de España

Macroeconomics from EconWPA

Abstract: This paper is a contribution to the literature on the factors behind financial stability, focusing on monetary policy design. In particular, it assesses empirically for a sample of 79 countries in the period 1970 to 2000 whether the choice of the central bank objectives and the monetary policy strategy affect financial stability. We find that focusing the central bank objectives on price stability reduces the likelihood of a banking crisis. This result is robust to several model specifications and groups of countries. As regards the monetary policy strategy, exchange rate targeting significantly reduces the likelihood of a banking crisis for some model specifications and, in particular, for the group of countries in transition.

Keywords: Monetary policy design; monetary policy objectives; monetary policy strategy; financial stability; and banking crisis (search for similar items in EconPapers)
JEL-codes: E52 E44 G21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-afr, nep-ifn and nep-mac
Date: 2003-04-21
Note: Type of Document - Acrobat PDF; prepared on PC; to print on HP; pages: 34 ; figures: included
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpma:0304008

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