Financial Stability and Interest-Rate Policy: A Quantitative Assessment of Costs and Benefits
IMF Working Papers, March 21, 2016
Source details
- Canonical URL
- Financial Stability and Interest-Rate Policy: A Quantitative Assessment of Costs and Benefits
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Bibliographic details
- Authors: Andrea Pescatori, Stefan Laseen
- Published: March 21, 2016
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475522679.001
Summary
- Should monetary policy use its short-term policy rate to stabilize the growth in household credit and housing prices with the aim of promoting financial stability? The paper asks this question for the case of Canada.
- Main finding: "to a first approximation, the answer is no— especially when the economy is slowing down."
- The Working Paper is intended to elicit comments and further debate; it does not represent the views of the IMF.
Major findings and conclusions
- Using the case of Canada, the authors find that using the short-term policy rate to target household credit growth and housing prices is generally not warranted.
- The conclusion is stronger when the economy is slowing down: leaning against credit and housing price growth via interest rates is less desirable in downturns.
Methodology and analytical approach
- The paper uses a Bayesian VAR framework and addresses concepts including Endogenous Financial Risk and Non-Linear Dynamics.
- Key analytical elements listed in the source: Bayesian VAR, monetary policy shock, crisis probability, crisis inflation.
Policy implications and evaluation
- The quantitative assessment implies limited benefits from adjusting the short-term policy rate for the purpose of stabilizing credit growth and housing prices.
- Policymakers should be cautious about using the central bank policy rate as a primary tool for financial-stability objectives, particularly in periods of economic slowdown.
Subject classifications and keywords
- Subject: Central bank policy rate, Credit, Financial crises, Financial sector policy and analysis, Financial sector stability, Financial services, Inflation, Money, Prices
- Keywords: Bayesian VAR, Central bank policy rate, Credit, credit growth, credit variable, crisis inflation, crisis probability, Endogenous Financial Risk, financial crisis, Financial sector stability, Global, Inflation, interest rate, Monetary Policy, monetary policy shock, Non-Linear Dynamics, Policy Evaluation, WP