The Financial Stability Dark Side of Monetary Policy
Antonio Conti () and
Fabrizio Venditti ()
No 1601, BCAM Working Papers from Birkbeck Centre for Applied Macroeconomics
Market risk premia play an important role in the transmission of monetary policy. If the transmission were to work asymmetrically for positive and negative shocks, monetary authorities would face a problematic trade-off: a temporary stimulus could boost the economy in the short run, but at the same time sow the seeds of a painful medium-run market reversal (the "financial stability dark side" of monetary policy of Stein, 2014). We study the relation between interest rates, credit spreads and output in the U.S. using monthly data and a range of nonlinear dynamic models. We find clear signs of a reduced-form asymmetry, but no evidence in support of the causal mechanism that underpins the 'dark side' argument: spreads rise noticeably ahead of economic slowdowns but they do not appear to cause them directly, particularly if they move in response to monetary shocks. This suggests that the asymmetry is best interpreted as a purely predictive relation, with markets being particularly sensitive to bad economic news; and that it creates no complications for monetary policy or for the exit strategy from monetary accommodation.
Keywords: risk premia; asymmetry; monetary policy; financial stability; local projections. (search for similar items in EconPapers)
JEL-codes: C32 E32 F34 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
http://www.bbk.ac.uk/ems/research/BirkCAM/working-papers/BCAM1601.pdf First version, 2016 (application/pdf)
Working Paper: The financial stability dark side of monetary policy (2017)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:bbk:bbkcam:1601
Ordering information: This working paper can be ordered from
Access Statistics for this paper
More papers in BCAM Working Papers from Birkbeck Centre for Applied Macroeconomics Malet St.,London WC1E 7HX, UK.
Bibliographic data for series maintained by ().