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Monetary ease: A factor behind financial crises? Some evidence from OECD countries

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  • Ahrend, Rudiger

Abstract

This paper addresses the question of whether and how easy monetary policy may lead to excesses in financial and real asset markets and ultimately result in financial dislocation. It presents evidence suggesting that periods when short-term interest rates were persistently and significantly below what Taylor rules would prescribe are correlated with increases in asset prices, especially as regards housing, though no systematic effects are identified on equity markets. Significant asset price increases, however, can also occur when interest rates are in line with Taylor rules, possibly associated with periods of financial deregulation and/or innovation. Finding also some support for a link of countries' pre-crisis monetary stance with the extent to which their financial sectors were hit during the recent crisis, the paper argues that accommodating monetary policy over the period 2002-2005, probably in combination with rapid financial market innovation, would, in retrospect, seem to have been among the factors behind the run-up in asset prices and financial imbalances - the (partial) unwinding of which helped trigger the recent financial market crisis. --

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Bibliographic Info

Article provided by Kiel Institute for the World Economy in its journal Economics: The Open-Access, Open-Assessment E-Journal.

Volume (Year): 4 (2010)
Issue (Month): 12 ()
Pages: 1-30

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Handle: RePEc:zbw:ifweej:201012

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Keywords: Interest rates; monetary policy; housing; sub-prime crisis; financial markets; macro-prudential; regulation; Taylor rule; house prices; asset prices; financial imbalances; market turmoil; financial innovation;

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References

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  1. Oecd, 2006. "Are House Prices Nearing a Peak?: A Probit Analysis for 17 OECD Countries," OECD Economics Department Working Papers 488, OECD Publishing.
  2. Rudiger Ahrend & Boris Cournède & Robert W.R. Price, 2008. "Monetary Policy, Market Excesses and Financial Turmoil," OECD Economics Department Working Papers 597, OECD Publishing.
  3. John Taylor, 2007. "Housing and Monetary Policy," Discussion Papers, Stanford Institute for Economic Policy Research 07-003, Stanford Institute for Economic Policy Research.
  4. Rudiger Ahrend & Jens Arnold & Fabrice Murtin, 2009. "Prudential Regulation and Competition in Financial Markets," OECD Economics Department Working Papers 735, OECD Publishing.
  5. Del Negro, Marco & Otrok, Christopher, 2007. "99 Luftballons: Monetary policy and the house price boom across U.S. states," Journal of Monetary Economics, Elsevier, Elsevier, vol. 54(7), pages 1962-1985, October.
  6. Rudiger Ahrend & Jens Arnold & Fabrice Murtin, 2011. "Have more strictly regulated banking systems fared better during the recent financial crisis?," Applied Economics Letters, Taylor & Francis Journals, Taylor & Francis Journals, vol. 18(5), pages 399-403.
  7. Detken, Carsten & Smets, Frank, 2004. "Asset price booms and monetary policy," Working Paper Series, European Central Bank 0364, European Central Bank.
  8. Rudiger Ahrend & Pietro Catte & Robert W.R. Price, 2006. "Factors Behind Low Long-Term Interest Rates," OECD Economics Department Working Papers 490, OECD Publishing.
  9. Ben S. Bernanke & Cara S. Lown, 1991. "The Credit Crunch," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 22(2), pages 205-248.
  10. Burkhard Drees & Ceyla Pazarbasioglu, 1998. "The Nordic Banking Crisis," IMF Occasional Papers, International Monetary Fund 161, International Monetary Fund.
  11. Stephen G. Cecchetti, 2006. "Measuring the Macroeconomic Risks Posed by Asset Price Booms," NBER Working Papers 12542, National Bureau of Economic Research, Inc.
  12. Boris Cournède & Rudiger Ahrend & Robert W.R. Price, 2008. "Have Long-term Financial Trends Changed the Transmission of Monetary Policy?," OECD Economics Department Working Papers 634, OECD Publishing.
  13. Abdul Abiad & Enrica Detragiache & Thierry Tressel, 2010. "A New Database of Financial Reforms," IMF Staff Papers, Palgrave Macmillan, vol. 57(2), pages 281-302, June.
  14. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 39(1), pages 195-214, December.
  15. Peter Hoeller & David Rae, 2007. "Housing Markets and Adjustment in Monetary Union," OECD Economics Department Working Papers 550, OECD Publishing.
  16. David Rae & Paul van den Noord, 2006. "Ireland's Housing Boom: What has Driven it and Have Prices Overshot?," OECD Economics Department Working Papers 492, OECD Publishing.
  17. Nigel Pain & Isabell Koske & Marte Sollie, 2006. "Globalisation and Inflation in the OECD Economies," OECD Economics Department Working Papers 524, OECD Publishing.
  18. Nathalie Girouard & Mike Kennedy & Paul van den Noord & Christophe André, 2006. "Recent House Price Developments: The Role of Fundamentals," OECD Economics Department Working Papers 475, OECD Publishing.
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Citations

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Cited by:
  1. Taylor, John B., 2013. "International monetary coordination and the great deviation," Journal of Policy Modeling, Elsevier, Elsevier, vol. 35(3), pages 463-472.
  2. John B. Taylor, 2012. "Monetary Policy Rules Work and Discretion Doesn’t: A Tale of Two Eras," Discussion Papers, Stanford Institute for Economic Policy Research 11-019, Stanford Institute for Economic Policy Research.
  3. John B. Taylor, 2013. "The Effectiveness of Central Bank Independence Versus Policy Rules," Discussion Papers, Stanford Institute for Economic Policy Research 12-009, Stanford Institute for Economic Policy Research.
  4. Rudiger Ahrend & Jens Arnold & Fabrice Murtin, 2011. "Have more strictly regulated banking systems fared better during the recent financial crisis?," Applied Economics Letters, Taylor & Francis Journals, Taylor & Francis Journals, vol. 18(5), pages 399-403.
  5. Hubert Gabrisch & Lucjan T Orlowski, 2011. "Extreme Risks in Financial Markets and Monetary Policies of the Euro-Candidates," Comparative Economic Studies, Palgrave Macmillan, vol. 53(4), pages 511-534, December.
  6. Jannsen, Nils & Scheide, Joachim, 2011. "Ist die Geldpolitik in den USA zu expansiv?," Kiel Policy Brief, Kiel Institute for the World Economy (IfW) 26, Kiel Institute for the World Economy (IfW).
  7. Landais, Bernard, 2010. "The monetary origins of the financial and economic crisis," MPRA Paper 23769, University Library of Munich, Germany.
  8. Orlowski, Lucjan T., 2012. "Financial crisis and extreme market risks: Evidence from Europe," Review of Financial Economics, Elsevier, Elsevier, vol. 21(3), pages 120-130.
  9. Landais, Bernard, 2009. "La politique monétaire et la crise
    [Monetary Policy and The Crisis]
    ," MPRA Paper 15652, University Library of Munich, Germany.

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