Monetary policy, inflation, and crises: New evidence from history and administrative data

Gabriel Jimenez, Dmitry Kuvshinov, Jose-Luis Peydro and Bjoern Richter

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: We show that a U-shaped monetary rate path increases banking crisis risk, via credit and asset price cycles, analyzing 17 countries over 150 years. Monetary rate hikes (raw or instrumented using the international finance's trilemma) materially increase crisis risk, but only if rates were previously cut (or low) for long. Consistently, rate cuts in the first half of the U increase the likelihood of vulnerable "red zones" of high credit and asset prices, while subsequent rate hikes within "red zones" tend to trigger crises. We find similar dynamics for bank stock returns and profits. In post-1995 administrative data for Spain, a U-shaped rate path increases loan defaults, especially for ex-ante riskier borrowers and banks.

Keywords: monetary policy; financial stability; financial crises; credit; asset prices; banks; macro-finance (search for similar items in EconPapers)
JEL-codes: E44 E51 E52 G01 G12 G21 (search for similar items in EconPapers)
Date: 2022-12, Revised 2023-05
New Economics Papers: this item is included in nep-ban and nep-his
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Monetary Policy, Inflation, and Crises: New Evidence from History and Administrative Data (2022)
Working Paper: Monetary policy, inflation, and crises: New evidence from history and administrative data (2022)
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