Does Prolonged Monetary Policy Easing Increase Financial Vulnerability?

By Stephen Cecchetti, Tommaso Mancini Griffoli, Machiko Narita

March 24, 2017

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Format: Chicago

Stephen Cecchetti, Tommaso Mancini Griffoli, and Machiko Narita. Does Prolonged Monetary Policy Easing Increase Financial Vulnerability?, (USA: International Monetary Fund, 2017) accessed September 19, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

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.

Subject: Accommodative monetary policy, Asset and liability management, Asset management, Banking, Bond yields, Financial institutions, Financial sector policy and analysis, Financial sector risk, Financial services, Investment banking, Monetary policy

Keywords: Accommodative monetary policy, Africa, Asset management, Asset-to-equity leverage ratio, Banks, Bond yields, Financial institution leverage, Financial sector risk, Financial stability, Financial vulnerability, Global, Interest rate, Investment banking, Leverage benchmark, Monetary policy, Monetary policy easing, Monetary policy impulse, Monetary policy transmission mechanisms, Nonbank financial institutions, Nonbank leverage, Prolonged monetary policy easing, Quarter, Risk-taking behavior, Spillovers, WP

Publication Details

Pages:

31
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2017/065
Stock No:

WPIEA2017065
ISBN:

9781475588644
ISSN:

1018-5941

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