Assessing the Link between Price and Financial Stability

30 Pages Posted: 14 Sep 2014

See all articles by Christophe Blot

Christophe Blot

Observatoire Français des Conjonctures Economiques (OFCE)

Jerome Creel

Observatoire Francais des Conjonctures Economiques (OFCE); ESCP Europe

Paul Hubert

OFCE - Sciences Po; Banque de France

Fabien Labondance

Observatoire Français des Conjonctures Economiques (OFCE)

Francesco Saraceno

Observatoire Francais des Conjonctures Economiques, Paris (OFCE)

Date Written: July 12, 2014

Abstract

This paper aims at investigating first the (possibly time-varying) empirical relationship between price and financial stability, and second, the effects of some macro and policy variables on this relationship in the United States and the Eurozone. Three empirical methods are used to examine the relevance of A.J. Schwartz’s “conventional wisdom” that price stability would yield financial stability. Using simple correlations, VAR and Dynamic Conditional Correlations, we reject the hypotheses that price stability is positively correlated to financial stability and that the correlation is stable over time. The latter result and the analysis of the determinants of the link between price and financial stability cast some doubt on the appropriateness of the “leaning against the wind” monetary policy approach.

Keywords: Price stability, Financial stability, DCC-GARCH, VAR

JEL Classification: C32, E31, E44, E52

Suggested Citation

Blot, Christophe and Creel, Jerome and Hubert, Paul and Hubert, Paul and Labondance, Fabien and Saraceno, Francesco, Assessing the Link between Price and Financial Stability (July 12, 2014). Available at SSRN: https://ssrn.com/abstract=2495427 or http://dx.doi.org/10.2139/ssrn.2495427

Christophe Blot

Observatoire Français des Conjonctures Economiques (OFCE) ( email )

69 Quai d'Orsay
Paris 75004
France

Jerome Creel (Contact Author)

Observatoire Francais des Conjonctures Economiques (OFCE) ( email )

69 Quai d'Orsay
Paris 75007
France
+33 1 44 18 54 78 (Fax)

ESCP Europe ( email )

79, avenue de la République
Paris, 75011
France

Paul Hubert

OFCE - Sciences Po ( email )

10 place de Catalogne
Paris 75014
France

Banque de France ( email )

Paris
France

Fabien Labondance

Observatoire Français des Conjonctures Economiques (OFCE) ( email )

69 Quai d'Orsay
Paris 75004
France

Francesco Saraceno

Observatoire Francais des Conjonctures Economiques, Paris (OFCE) ( email )

69 Quai d'Orsay
75007 Paris
France

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