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How risky is Monetary Policy? The Effect of Monetary Policy on Systemic Risk in the Euro Area

Georg Leitner (), Teresa Hübel (), Anna Wolfmayr () and Manuel Zerobin ()

No 312, Department of Economics Working Paper Series from WU Vienna University of Economics and Business

Abstract: This paper empirically investigates the effect of monetary policy on systemic risk within the Euro area. We estimate a Bayesian proxy-VAR where we exploit high-frequency identified monetary policy surprises for identification. Employing aggregate as well as market specific systemic risk measures, we provide novel evidence on the heterogeneous risk transmission of conventional and unconventional monetary policy on different financial markets. We find that expansionary conventional monetary policy, near term guidance and forward guidance decrease systemic risk whereas quantitative easing (QE) increases systemic risk. While the effects are qualitatively homogeneous for near term guidance and forward guidance, there exists heterogeneity in the risk transmission of conventional monetary policy and QE across different financial markets. The latter increases systemic risk significantly within bond markets, foreign exchange markets and among financial intermediaries. This might be caused by increased search for yield behaviour as QE distinctively reduces longer term interest rates. Our analysis shows that there is a potential threat to financial stability caused by QE which should be concerned by monetary- and macroprudential policymakers.

Keywords: Monetary Policy; CISS; Systemic Risk; Bayesian-Proxy-VAR; High-Frequency Identification (search for similar items in EconPapers)
Date: 2021-03
New Economics Papers: this item is included in nep-eec, nep-mon and nep-rmg
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