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Monetary Policy and Financial Stability: Cross‐Country Evidence

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  • CHRISTIAN FRIEDRICH
  • KRISTINA HESS
  • ROSE CUNNINGHAM

Abstract

We explain the heterogeneous response of central banks to financial stability risks based on a financial stability orientation (FSO) index, which reflects statutory, regulatory, and discretionary components of central banks' monetary policy frameworks. Our baseline results from a cross‐country panel of modified Taylor rules suggest that central banks with a high FSO increase their policy rates in response to elevated financial stability risks by 0.27 percentage points more than central banks with a low orientation. Back‐of‐the‐envelope calculations suggest that this policy rate differential translates into a reduced crisis probability but also into considerably lower inflation and output growth rates.

Suggested Citation

  • Christian Friedrich & Kristina Hess & Rose Cunningham, 2019. "Monetary Policy and Financial Stability: Cross‐Country Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 51(2-3), pages 403-453, March.
    • Handle: RePEc:wly:jmoncb:v:51:y:2019:i:2-3:p:403-453
    DOI: 10.1111/jmcb.12526
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    Cited by:

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    2. Christian Friedrich & Pierre Guérin & Danilo Leiva-Leon, 2020. "Monetary Policy Independence and the Strength of the Global Financial Cycle," Staff Working Papers 20-25, Bank of Canada.
    3. repec:hal:spmain:info:hdl:2441/74362fq3f99s299n07e84dlcib is not listed on IDEAS
    4. Istrefi, Klodiana & Odendahl, Florens & Sestieri, Giulia, 2023. "Fed communication on financial stability concerns and monetary policy decisions: Revelations from speeches," Journal of Banking & Finance, Elsevier, vol. 151(C).
    5. Rose Cunningham & Christian Friedrich, 2016. "The Role of Central Banks in Promoting Financial Stability: An International Perspective," Discussion Papers 16-15, Bank of Canada.
    6. Blot, Christophe & Hubert, Paul & Labondance, Fabien, 2024. "The asymmetric effects of monetary policy on stock price bubbles," European Economic Review, Elsevier, vol. 168(C).
    7. Agénor, Pierre-Richard & Flamini, Alessandro, 2022. "Institutional mandates for macroeconomic and financial stability," Journal of Financial Stability, Elsevier, vol. 62(C).
    8. Arina Wischnewsky & David‐Jan Jansen & Matthias Neuenkirch, 2021. "Financial stability and the Fed: Evidence from congressional hearings," Economic Inquiry, Western Economic Association International, vol. 59(3), pages 1192-1214, July.
    9. Arina Wischnewsky & David‐Jan Jansen & Matthias Neuenkirch, 2021. "Financial stability and the Fed: Evidence from congressional hearings," Economic Inquiry, Western Economic Association International, vol. 59(3), pages 1192-1214, July.
    10. David M. Arseneau, 2020. "Central Bank Communication with a Financial Stability Objective," Finance and Economics Discussion Series 2020-087, Board of Governors of the Federal Reserve System (U.S.).
    11. Oparah Felix Chukwudi & James Tumba Henry, 2020. "Monetary Policy and Financial Stability in the Nigerian Banking Industry," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 11(1), pages 82-114, January.
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    More about this item

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • G01 - Financial Economics - - General - - - Financial Crises

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