Monetary shocks, macroprudential shocks and financial stability

Matthew Greenwood-Nimmo and Artur Tarassow ()

Economic Modelling, 2016, vol. 56, issue C, 11-24

Abstract: This paper examines the implications of monetary shocks and macroprudential shocks for aggregate financial fragility using a sign restricted VAR model estimated with US data spanning the period 1960Q1–2007Q4. Contractionary monetary shocks are found to exacerbate financial fragility, increasing both the credit to GDP ratio and the ‘financial ratio’, which is the ratio of firms' debts to their internal funds. By contrast, when interest rates are fixed, credit-constraining macroprudential shocks may be able to reduce the credit to GDP ratio in the short run but are not able to reduce the financial ratio. However, when the interest rate is free to accommodate the macroprudential shock, both the credit to GDP ratio and the financial ratio decline, indicating a reduction of financial fragility and suggesting that there may be gains from a coordinated approach to macroeconomic management.

Keywords: Financial stability; Monetary policy; Macroprudential policy; Sign restrictions (search for similar items in EconPapers)
JEL-codes: C32 C51 C54 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (20)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:56:y:2016:i:c:p:11-24

DOI: 10.1016/j.econmod.2016.03.003

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