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Financial stability considerations in the conduct of monetary policy

Author

Listed:
  • Bochmann, Paul
  • Dieckelmann, Daniel
  • Fahr, Stephan
  • Ruzicka, Josef
Abstract
We empirically analyze the interaction of monetary policy with financial stability and the real economy in the euro area. For this, we apply a quantile vector autoregressive model and two alternative estimation approaches: simulation and local projections. Our specifications include monetary policy surprises, real GDP, inflation, financial vulnerabilities and systemic financial stress. We disentangle conventional and unconventional monetary policy by separating interest rate surprises into two factors that move the yield curve either at the short end or at the long end. Our results show that a build-up of financial vulnerabilities tends to be accompanied initially by subdued financial stress which resurges, however, over a medium-term horizon, harming economic growth. Tighter conventional monetary policy reduces inflationary pressures but increases the risk of financial stress. [...] JEL Classification: E31, E52, G01, G10

Suggested Citation

  • Bochmann, Paul & Dieckelmann, Daniel & Fahr, Stephan & Ruzicka, Josef, 2023. "Financial stability considerations in the conduct of monetary policy," Working Paper Series 2870, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20232870
    Note: 2285252
    as

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    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecb.wp2870~ec3546d6e8.en.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    macroprudential policy; monetary policy; monetary policy identification; quantile regressions; financial stability;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G01 - Financial Economics - - General - - - Financial Crises
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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