Does Prolonged Monetary Policy Easing Increase Financial Vulnerability?

Author/Editor:

Stephen Cecchetti ; Tommaso Mancini Griffoli ; Machiko Narita

Publication Date:

March 24, 2017

Electronic Access:

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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.

Series:

Working Paper No. 17/65

Subject:

English

Publication Date:

March 24, 2017

ISBN/ISSN:

9781475588644/1018-5941

Stock No:

WPIEA2017065

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

31

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