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Threshold effects of financial stress on monetary policy rules: A panel data analysis

Danvee Floro and Björn van Roye

International Review of Economics & Finance, 2017, vol. 51, issue C, 599-620

Abstract: This study tests for the state-dependent response of monetary policy to increases in overall financial stress and financial sector-specific stress across a panel of advanced and emerging economy countries. We use a factor-augmented dynamic panel threshold regression model with (estimated) common error components to deal with cross-sectional dependence. We find strong evidence of advanced economy countries' aggressive monetary policy loosening in response to stock market and banking stress but only in times of high financial market volatility. By comparison, evidence of threshold effects of financial stress is generally weak for emerging market countries’ interest rate decisions.

Keywords: Financial stress; Monetary policy; Factor-augmented dynamic panel threshold regression; Cross-sectional dependence (search for similar items in EconPapers)
JEL-codes: E31 E44 E52 E58 C23 C24 (search for similar items in EconPapers)
Date: 2017
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Working Paper: Threshold effects of financial stress on monetary policy rules: a panel data analysis (2017) Downloads
Working Paper: Threshold Effects of Financial Stress on Monetary Policy Rules: A Panel Data Analysis (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:51:y:2017:i:c:p:599-620

DOI: 10.1016/j.iref.2017.07.023

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