Does Prolonged Monetary Policy Easing Increase Financial Vulnerability?

Stephen Cecchetti, Tommaso Mancini-Griffoli and Machiko Narita

No 2017/065, 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: WP; monetary policy; monetary policy easing; interest rate; quarter; Banks; nonbank financial institutions; prolonged monetary policy easing; financial vulnerability; financial stability; risk-taking behavior; spillovers; nonbank leverage; asset-to-equity leverage ratio; monetary policy transmission mechanisms; financial institution leverage; leverage benchmark; monetary policy impulse; Financial sector risk; Investment banking; Asset management; Bond yields; Accommodative monetary policy; Global; Africa (search for similar items in EconPapers)
Pages: 31
Date: 2017-03-24
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Citations: View citations in EconPapers (24)

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