Monetary policy reaction function and the financial cycle

Andrew Filardo, Paul Hubert and Phurichai Rungcharoenkitkul

Journal of Banking & Finance, 2022, vol. 142, issue C

Abstract: We examine whether the systematic response of monetary policy to financial imbalances matters for financial stability. We measure how responsive the Federal Reserve's policy is to imbalances in the equity, housing and credit markets. We find that changes in these policy sensitivities predict the subsequent development of financial imbalances. When monetary policy responds more counter-cyclically to market overheating, imbalances tend to decline over time. This effect is distinct from that of current and anticipated interest rate levels – the risk-taking channel. The evidence highlights the importance of the systematic component of monetary policy reaction function in shaping the financial cycle.

Keywords: Monetary policy reaction function; Asset price booms; Credit booms; Monetary policy; Financial cycles; Time-varying models (search for similar items in EconPapers)
JEL-codes: E50 E52 G00 G01 G12 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:142:y:2022:i:c:s0378426622001303

DOI: 10.1016/j.jbankfin.2022.106536

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