Does Prolonged Monetary Policy Easing Increase Financial Vulnerability?

32 Pages Posted: 12 May 2017

See all articles by Stephen G. Cecchetti

Stephen G. Cecchetti

Brandeis International Business School; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Tommaso Mancini Griffoli

International Monetary Fund (IMF)

Machiko Narita

International Monetary Fund (IMF)

Date Written: March 2017

Abstract

Using firm-level data for approximately 1,000 bank and nonbank financial institutions in 22 countries over the past 15 years we study the impact of prolonged monetary policy easing on risk-taking behavior. We find that the leverage ratio, as well as other measures of firm-level vulnerability, increases for banks and nonbanks as domestic monetary policy easing persists. Cross-border effects are also notable. We find effects of roughly similar magnitude on foreign financial sector firms when the U.S. eases policy. Results appear robust to a variety of specifications, and to be non-linear, with risk-taking behavior rising most quickly at the onset of monetary policy easing.

Keywords: Spillovers, Banks, Financial stability, nonbank financial institutions, prolonged monetary policy easing, financial vulnerability, risk-taking behavior, Financial Markets and the Macroeconomy, Monetary Policy (Targets, Instruments, and Effects)

JEL Classification: E44, E52, G21, G23, G32

Suggested Citation

Cecchetti, Stephen G. and Mancini Griffoli, Tommaso and Narita, Machiko, Does Prolonged Monetary Policy Easing Increase Financial Vulnerability? (March 2017). IMF Working Paper No. 17/65. Available at SSRN: https://ssrn.com/abstract=2967420

Stephen G. Cecchetti (Contact Author)

Brandeis International Business School ( email )

415 South Street
Waltham, MA 02453
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States
212-720-8629 (Phone)
212-720-2630 (Fax)

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Tommaso Mancini Griffoli

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Machiko Narita

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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