Loose monetary policy and financial instability

Maximilian Grimm, Jordà , Òscar, Moritz Schularick and Alan Taylor

No 17896, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Do periods of persistently loose monetary policy increase financial fragility and the likelihood of a financial crisis? This is a central question for policymakers, yet the literature does not provide systematic empirical evidence about this link at the aggregate level. In this paper we fill this gap by analyzing long-run historical data. We find that when the stance of monetary policy is accommodative over an extended period, the likelihood of financial turmoil down the road increases considerably. We investigate the causal pathways that lead to this result and argue that credit creation and asset price overheating are important intermediating channels.

Keywords: Financial crises; Crisis prediction; Monetary policy; Natural rate (search for similar items in EconPapers)
JEL-codes: E43 E44 E52 E58 G01 G21 N10 (search for similar items in EconPapers)
Date: 2023-02
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Related works:
Working Paper: Loose Monetary Policy and Financial Instability (2023)
Working Paper: Loose Monetary Policy and Financial Instability (2023)
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