Working Paper: CEPR ID: DP14797
Authors: Moritz Schularick; Lucas Ter Steege; Felix Ward
Abstract: Can central banks defuse rising stability risks in financial booms by leaning against the wind with higher interest rates? This paper studies the state-dependent effects of monetary policy on financial crisis risk. Based on the near-universe of advanced economy financial cycles since the 19th century, we show that discretionary leaning against the wind policies during credit and asset price booms are more likely to trigger crises than prevent them.
Keywords: financial stability; monetary policy; local projections
JEL Codes: E44; E50; G01; G15; N10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| DLAW monetary policy (E52) | financial crisis risk (G01) |
| 1 percentage point increase in policy rates (E43) | financial crisis risk (G01) |
| DLAW monetary policy (E52) | severity of crises (H12) |
| DLAW monetary policy (E52) | crisis probability (H12) |
| DLAW monetary policy (E52) | long-run average levels of crisis risk (H12) |