The Interaction Between ConventionalMonetary Policy and Financial Stability: Chile, Colombia, Japan, Portugal and the UK

No 2019/96, Working Papers REM from ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa

Abstract: The relationship between monetary policy and financial stability has gained importance in recent years as Central Bank policy rates neared the zero-lower bound. The need to coordinate policy choices, to expand the scope of monetary policy measures and lastly, the need to target financial stability objectives while maintaining a primary objective of financial stability, has become essential. We use an SVAR model and impulse response functions to study the impact of monetary policy shocks on three proxiesforfinancial stabilityas well as a proxy for economic growth. Our main results show that the Central Bank policy rate may be used to correct asset mispricing due to the inverse relationship between the policy rate and the stock market index. The results also show that, in line with theory,the exchange rate appreciates following a positive interest rate shock. Although the impact is only statistically significant for industrial production for the case of the UK, conventional monetary policy may indeed be able to contribute to financial stability when used in conjunction with alternative policy choices.

Keywords: Monetary Policy; Financial Stability; Structural Vector Autoregressive Model (search for similar items in EconPapers)
JEL-codes: E52 F34 F42 F55 (search for similar items in EconPapers)
Date: 2019-09
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Journal Article: The Interaction Between Conventional Monetary Policy and Financial Stability: Chile, Colombia, Japan, Portugal and the UK (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:ise:remwps:wp0962019

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