Monetary Policy and Financial (In)Stability: An Integrated Micro-Macro Approach
24 Pages Posted: 28 Feb 2007
Date Written: February 2007
Abstract
Central banks focus on two objectives today: monetary and financial stability. Empirical evidence on this twin objective is scarce. We aim to contribute on the issue with an integrated micro-macro approach with two core virtues. First, we measure financial stability at the bank level for Europe's largest economy: Germany. Second, we specify a VAR model with feedback between the micro- and macroeconomic model components. This enables us to assess second round effects. Our results confirm the existence of a trade-off between monetary and financial stability. An unexpected tightening of monetary policy increases the mean probability of distress. This effect disappears when neglecting feedback effects, underlining the crucial importance of the former. Distress responses differ across banking groups and the severity of distress events. Hence, a more detailed account of heterogenous transmission dynamics beyond aggregate measures of financial stability is corroborated. An important policy implication is that the separation of financial supervision and monetary policy requires close collaboration among members in the European System of Central Banks and other national supervision authorities.
Keywords: financial stability, stress testing, bank distress, monetary policy
JEL Classification: E42, E52, E58, G21, G28
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Regulatory and Supervisory Independence and Financial Stability
By Marc Quintyn and Michael Taylor
-
Revisiting the Rationale for a Single National Financial Services Regulator
-
Integrated Financial Supervision: Lessons from Northern European Experience
By Michael Taylor and Alex Fleming
-
A Cross-Country Analysis of the Bank Supervisory Framework and Bank Performance
By James R. Barth, Daniel E. Nolle, ...
-
The Changing Borders of Banking: Trends and Implications
By Claudio E. V. Borio and Renato Filosa
-
Issues in the Unification of Financial Sector Supervision
By Richard Abrams and Michael Taylor
-
Issues in the Unification of Financial Sector Supervision
By Richard Abrams and Michael Taylor
-
Crisis Prevention and Crisis Management The Role of Regulatory Governance
By Udaibir Das and Marc Quintyn
-
An International Comparison and Assessment of the Structure of Bank Supervision
By James R. Barth, Luis G. Dopico, ...
-
The Accountability of Financial Sector Supervisors Principles and Practice
By Marc Quintyn, Eva H.g. Hüpkes, ...