The Financial Stability Dark Side of Monetary Policy

50 Pages Posted: 28 Aug 2017

Multiple version iconThere are 2 versions of this paper

Date Written: June 16, 2017

Abstract

Since monetary policy affects risk premiums, and these appear to have a stronger influence on economic activity when they rise than when they fall, temporary monetary expansions may both stimulate the economy and sow the seeds of damaging financial market corrections in the future. We investigate this possibility by using local projection methods to examine the propagation of monetary shocks through US corporate bond markets. We find that, while the transmission of monetary shocks is symmetric, the impact of macroeconomic data releases is asymmetric: spreads are more responsive to bad news. Crucially, these responses precede economic slowdowns rather than directly cause them.

Keywords: monetary policy, financial stability, risk premia, macro news, local projections

JEL Classification: C32, E32, F34

Suggested Citation

Alessandri, Piergiorgio and Conti, Antonio Maria and Venditti, Fabrizio, The Financial Stability Dark Side of Monetary Policy (June 16, 2017). Bank of Italy Temi di Discussione (Working Paper) No. 1121. Available at SSRN: https://ssrn.com/abstract=3026025 or http://dx.doi.org/10.2139/ssrn.3026025

Piergiorgio Alessandri

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Antonio Maria Conti

Banca d'Italia ( email )

Via Nazionale 91
Roma, 00161
Italy

Fabrizio Venditti (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy

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