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Financial Instability and Monetary Policy: The Swedish Evidence

Author

Listed:
  • Bergman, U. Michael

    (Department of Economics, Lund University)

  • Hansen, Jan

    (Research Department, Central Bank of Sweden)

Abstract

This paper examines the relationship between financial instability and monetary policy within the Swedish economy. Based on a standard VAR model of monetary policy extended to include measures of financial instability and credit expansions, we examine the interaction between monetary policy and financial stability. We find that both higher interest rates, higher prices and lending expansions contribute to financial instability. As the effects from price shocks are strong and persistent compared to other shocks, our conclusion is that we cannot reject that price stability and financial stability are mutually consistent goals for monetary policy.

Suggested Citation

  • Bergman, U. Michael & Hansen, Jan, 2002. "Financial Instability and Monetary Policy: The Swedish Evidence," Working Paper Series 137, Sveriges Riksbank (Central Bank of Sweden).
    • Handle: RePEc:hhs:rbnkwp:0137
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    File URL: http://www.riksbank.com/upload/6745/wp_137.pdf
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    References listed on IDEAS

    as
    1. Christiano, Lawrence J. & Eichenbaum, Martin & Evans, Charles L., 1999. "Monetary policy shocks: What have we learned and to what end?," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 2, pages 65-148, Elsevier.
    2. Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 27-48, Fall.
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    7. Bean, Charles, 1998. "Monetary Policy under EMU," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 14(3), pages 41-53, Autumn.
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    11. Michael D. Bordo & David C. Wheelock, 1998. "Price stability and financial stability: the historical record," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 41-62.
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    Cited by:

    1. Hansen, Jan, 2003. "Financial Cycles and Bankruptcies in the Nordic Countries," Working Paper Series 149, Sveriges Riksbank (Central Bank of Sweden).
    2. Campbell, Gareth & Coyle, Christopher & Turner, John D., 2016. "This time is different: Causes and consequences of British banking instability over the long run," Journal of Financial Stability, Elsevier, vol. 27(C), pages 74-94.

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    More about this item

    Keywords

    Financial instability; monetary policy; VAR model; structural shocks;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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