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Monetary Ease: A Factor behind Financial Crises? Some Evidence from OECD Countries

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  • Ahrend, Rudiger
Abstract
This paper addresses the question of whether and how easy monetary policy may lead to excesses in financial and real asset markets and ultimately result in financial dislocation. It presents evidence suggesting that periods when short-term interest rates have been persistently and significantly below what Taylor rules would prescribe are correlated with increases in asset prices, especially as regards housing, though no systematic effects are identified on equity markets. Significant asset price increases, however, can also occur when interest rates are in line with Taylor rules, associated with periods of financial deregulation and/or innovation. The paper argues that accommodating monetary policy over the period 2002-2005, in combination with rapid financial market innovation, would seem in retrospect to have been among the factors behind the run-up in asset prices and financial imbalances -- the (partial) unwinding of which helped trigger the 2007/08 financial market turmoil.

Suggested Citation

  • Ahrend, Rudiger, 2008. "Monetary Ease: A Factor behind Financial Crises? Some Evidence from OECD Countries," Economics Discussion Papers 2008-44, Kiel Institute for the World Economy (IfW Kiel).
    • Handle: RePEc:zbw:ifwedp:7465
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    References listed on IDEAS

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    More about this item

    Keywords

    Interest rates; monetary policy; housing; sub-prime crisis; financial markets; macro-prudential; regulation Taylor rule; house prices;
    All these keywords.

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • F3 - International Economics - - International Finance
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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