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Does Prolonged Monetary Policy Easing Increase Financial Vulnerability?

Stephen Cecchetti (), Tommaso Mancini Griffoli and Machiko Narita ()

No 17/65, IMF Working Papers from International Monetary Fund

Abstract: Using firm-level data for approximately 1,000 bank and nonbank financial institutions in 22 countries over the past 15 years we study the impact of prolonged monetary policy easing on risk-taking behavior. We find that the leverage ratio, as well as other measures of firm-level vulnerability, increases for banks and nonbanks as domestic monetary policy easing persists. Cross-border effects are also notable. We find effects of roughly similar magnitude on foreign financial sector firms when the U.S. eases policy. Results appear robust to a variety of specifications, and to be non-linear, with risk-taking behavior rising most quickly at the onset of monetary policy easing.

Keywords: Monetary policy; Spillovers; United States; Banks; Financial institutions; Nonbank financial sector; Financial stability; nonbank financial institutions, prolonged monetary policy easing, financial vulnerability, risk-taking behavior, Financial Markets and the Macroeconomy, Monetary Policy (Targets, Instruments, and Effects), Monetary Policy (Targets Instruments and Effects) (search for similar items in EconPapers)
Pages: 31
Date: 2017-03-24
New Economics Papers: this item is included in nep-ban, nep-cba and nep-mac
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