Financial Stability and the Design of Monetary Policy
BBVA Hong Kong Branch - International Finance Centre
Pedro Del Rio Lopez
Bank of Spain
Banco de Espana Working Paper No. 0315
Financial Markets in Central and Eastern Europe, 2004
Journal of International Money and Finance, Forthcoming
This paper builds upon the existing empirical literature on the factors behind financial stability, focusing on the role of monetary policy design. In particular, it analyzes a sample of 79 countries in the period 1970 to 1999 to evaluate the effect of the choice of the central bank objectives and the monetary policy strategy on the occurrence of banking crises. We find that focusing the central bank objectives on price stability reduces the likelihood of a banking crisis. This result is robust, in general, to several model specifications and groups of countries. As for the monetary policy strategy, the results are less clear. For a few model specifications, particularly for the group of countries in transition, the choice of an exchange rate-based strategy appears to reduce the likelihood of a banking crisis. Finally, a large degree of independence of the central bank and locating regulatory and supervisory responsibilities at the central bank seem to reduce the likelihood of a banking crisis.
Number of Pages in PDF File: 61
Keywords: Monetary policy design, monetary policy objectives, monetary policy strategy, financial stability, and banking crisis
JEL Classification: E52, E44, G21working papers series
Date posted: January 5, 2004 ; Last revised: August 25, 2009
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