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Monetary Policy and Financial Stability: Cross‐Country Evidence

Christian Friedrich, Kristina Hess and Rose Cunningham

Journal of Money, Credit and Banking, 2019, vol. 51, issue 2-3, 403-453

Abstract: We explain the heterogeneous response of central banks to financial stability risks based on a financial stability orientation (FSO) index, which reflects statutory, regulatory, and discretionary components of central banks' monetary policy frameworks. Our baseline results from a cross‐country panel of modified Taylor rules suggest that central banks with a high FSO increase their policy rates in response to elevated financial stability risks by 0.27 percentage points more than central banks with a low orientation. Back‐of‐the‐envelope calculations suggest that this policy rate differential translates into a reduced crisis probability but also into considerably lower inflation and output growth rates.

Date: 2019
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Working Paper: Monetary Policy and Financial Stability: Cross-Country Evidence (2015) Downloads
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