Impact of monetary policy on financial stability in good times

Peterson Ozili

MPRA Paper from University Library of Munich, Germany

Abstract: Little attention has been paid to the role of central bank interest rate and monetary aggregates in influencing financial stability in good times. This study examines the impact of monetary policy on financial stability in good years. It focuses on the impact of three monetary policy tools on financial stability. The study used the median quantile regression method to analyze 22 countries during the 2011 to 2018 period – a period which isolates the shock from the COVID-19 pandemic and the shock from the global financial crisis. The financial stability indicator is the country-level bank nonperforming loans ratio. The monetary policy indicators are broad money growth, broad money to GDP ratio and the central bank interest rate, while controlling for the inflation rate, total unemployment rate, efficiency ratio, institutional governance quality and economic growth rate. The findings reveal that high central bank interest rates impair financial stability by increasing the bank nonperforming loans ratio in African countries and developing countries. In contrast, high central bank interest rates improve financial stability in developed countries and emerging market countries. Furthermore, higher broad money growth improves financial stability in European banks while broad money growth, broad money to GDP ratio and central bank interest rate do not have a significant effect on the NPL ratio of Asian banks.

Keywords: monetary policy; financial stability; nonperforming loans; interest rate; central bank; broad money; institutional quality; domestic private credit; economic growth; unemployment; inflation; efficiency; quantile regression (search for similar items in EconPapers)
JEL-codes: E31 G21 G23 G28 (search for similar items in EconPapers)
Date: 2025
New Economics Papers: this item is included in nep-mon
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Journal Article: Impact of monetary policy on financial stability in good times (2025)
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