Monetary and Financial Stability in the Euro Area: Pro-Cyclicality Versus Trade-Off

Posted: 30 Sep 2013

See all articles by Brigitte Granville

Brigitte Granville

Queen Mary, University of London

Sushanta Mallick

Queen Mary - University of London; Queen Mary University of London

Date Written: 2009

Abstract

This paper investigates the nexus between monetary stability and financial stability. We examine, in the experience of EMU between 1994 and 2008, first, the response of the term structure of interest rates, share prices, exchange rates, property price inflation and the deposit-loan ratio of the banking sector (our proxies for financial stability) to changes in the consumer price level and ECB policy rate (our proxies for monetary stability); second, whether and to what extent lower inflation has caused share price stability and how ECB policy rate has reacted to inflation. Using a sign-restriction-based VAR approach, we find that there is a pro-cyclical relationship between monetary and financial stability in the long-run. With a positive inflation shock, we find on average a 2% estimated decline in share prices. This suggests that the interest rate instrument used for inflation targeting is conducive to financial stability.

Keywords: Financial stability; Monetary policy, EMU, VAR sign restriction

JEL Classification: E30; E44, E50, G10

Suggested Citation

Granville, Brigitte Evelyne and Mallick, Sushanta and Mallick, Sushanta, Monetary and Financial Stability in the Euro Area: Pro-Cyclicality Versus Trade-Off (2009). Journal of International Financial Markets, Institutions and Money, Vol. 19, No. 4, 2009, Available at SSRN: https://ssrn.com/abstract=2333827

Brigitte Evelyne Granville (Contact Author)

Queen Mary, University of London ( email )

Mile End Road
London, London E1 4NS
United Kingdom

Sushanta Mallick

Queen Mary - University of London ( email )

School of Business and Management
Mile End Road
London, England E1 4NS
United Kingdom
+44 20 7882 7447 (Phone)

HOME PAGE: http://skmallick.busman.qmul.ac.uk/

Queen Mary University of London ( email )

Mile End Rd
London, E1 4NS
United Kingdom
+44 20 7882 7447 (Phone)

HOME PAGE: http://skmallick.busman.qmul.ac.uk/

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