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

Björn van Roye and Danvee Floro

No 2042, Working Paper Series from European Central Bank

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 central banks. We use a factor-augmented dynamic panel threshold regression model with (estimated) common components to deal with crosssectional dependence. We find strong evidence of state-dependence in the response of monetary policy to financial sector-specific stress for advanced economy central banks, as they pursue aggressive monetary policy loosening in response to stock market and banking stress only in times of high financial market volatility. By comparison, evidence of threshold effects of financial stress is generally weak for emerging market central banks. JEL Classification: E31, E44, E52, E58, C23, C24

Keywords: cross-section dependence; Financial stress; monetary policy; threshold panel regression (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Date: 2017-04
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Related works:
Journal Article: 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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