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The financial stability dark side of monetary policy

Piergiorgio Alessandri, Antonio Conti () and Fabrizio Venditti ()

No 1121, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: Since monetary policy affects risk premiums, and these appear to have a stronger influence on economic activity when they rise than when they fall, temporary monetary expansions may both stimulate the economy and sow the seeds of damaging financial market corrections in the future. We investigate this possibility by using local projection methods to examine the propagation of monetary shocks through US corporate bond markets. We find that, while the transmission of monetary shocks is symmetric, the impact of macroeconomic data releases is asymmetric: spreads are more responsive to bad news. Crucially, these responses precede economic slowdowns rather than directly cause them.

Keywords: monetary policy; financial stability; risk premia; macro news; 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-cba, nep-mac and nep-mon
Date: 2017-06
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Related works:
Working Paper: The Financial Stability Dark Side of Monetary Policy (2016) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:bdi:wptemi:td_1121_17

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