Working Paper: NBER ID: w30958
Authors: Maximilian Grimm; Scar Jord; Moritz Schularick; Alan M. Taylor
Abstract: Do periods of persistently loose monetary policy increase financial fragility and the likelihood of a financial crisis? This is a central question for policymakers, yet the literature does not provide systematic empirical evidence about this link at the aggregate level. In this paper we fill this gap by analyzing long-run historical data. We find that when the stance of monetary policy is accommodative over an extended period, the likelihood of financial turmoil down the road increases considerably. We investigate the causal pathways that lead to this result and argue that credit creation and asset price overheating are important intermediating channels.
Keywords: No keywords provided
JEL Codes: E43; E44; E52; E58; G01; G21; N10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Monetary policy stance (E63) | likelihood of financial crises (G01) |
| Loose monetary policy (E52) | financial fragility (G51) |
| Loose monetary policy (E52) | credit creation (E51) |
| Loose monetary policy (E52) | asset price overheating (G19) |
| credit creation (E51) | financial fragility (G51) |
| asset price overheating (G19) | financial fragility (G51) |