Financial stability considerations in the conduct of monetary policy

Paul Bochmann, Daniel Dieckelmann, Stephan Fahr and Josef Ruzicka

No 2870, Working Paper Series from European Central Bank

Abstract: We empirically analyze the interaction of monetary policy with financial stability and the real economy in the euro area. For this, we apply a quantile vector autoregressive model and two alternative estimation approaches: simulation and local projections. Our specifications include monetary policy surprises, real GDP, inflation, financial vulnerabilities and systemic financial stress. We disentangle conventional and unconventional monetary policy by separating interest rate surprises into two factors that move the yield curve either at the short end or at the long end. Our results show that a build-up of financial vulnerabilities tends to be accompanied initially by subdued financial stress which resurges, however, over a medium-term horizon, harming economic growth. Tighter conventional monetary policy reduces inflationary pressures but increases the risk of financial stress. [...] JEL Classification: E31, E52, G01, G10

Keywords: macroprudential policy; monetary policy; monetary policy identification; quantile regressions; financial stability (search for similar items in EconPapers)
Date: 2023-11
New Economics Papers: this item is included in nep-ban, nep-cba, nep-eec, nep-fdg and nep-mon
Note: 2285252
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20232870

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