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Financial stability and the design of monetary policy

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  • Alicia García Herrero

    ()
    (Banco de España)

  • Pedro del Río

    ()
    (Banco de España)

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    Abstract

    This paper builds upon the existing empirical literature on the factors behind financial stability, focusing on the role of monetary policy design. In particular, it analyzes a sample of 79 countries in the period 1970 to 1999 to evaluate the effect of the choice of the central bank objectives and the monetary policy strategy on the occurrence of banking crises. We find that focusing the central bank objectives on price stability reduces the likelihood of a banking crisis. This result is robust, in general, to several model specifications and groups of countries. As for the monetary policy strategy, the results are less clear. For a few model specifications, particularly for the group of countries in transition, the choice of an exchange rate-based strategy appears to reduce the likelihood of a banking crisis. Finally, a large degree of independence of the central bank and locating regulatory and supervisory responsibilities at the central bank seem to reduce the likelihood of a banking crisis.

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    File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/03/Fic/dt0315e.pdf
    File Function: First version, November 2003
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    Bibliographic Info

    Paper provided by Banco de Espa�a in its series Banco de Espa�a Working Papers with number 0315.

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    Length: 61 pages
    Date of creation: Nov 2003
    Date of revision:
    Handle: RePEc:bde:wpaper:0315

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    Related research

    Keywords: Monetary policy design; monetary policy objectives; monetary policy strategy; financial stability; banking crisis;

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    References

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    Cited by:
    1. Berger, Wolfram & Kißmer, Friedrich, 2013. "Central bank independence and financial stability: A tale of perfect harmony?," European Journal of Political Economy, Elsevier, vol. 31(C), pages 109-118.
    2. International Monetary Fund, 2004. "Toward a Framework for Safeguarding Financial Stability," IMF Working Papers 04/101, International Monetary Fund.
    3. Klomp, Jeroen & de Haan, Jakob, 2009. "Central bank independence and financial instability," Journal of Financial Stability, Elsevier, vol. 5(4), pages 321-338, December.
    4. Chrigui, Zouhair & Boujelbene, Younes & Mhamdi, Ghrissi, 2011. "Central Bank independence and inflation: Evidence from emerging countries," Journal of Policy Modeling, Elsevier, vol. 33(3), pages 453-469, May.
    5. Dalla Pellegrina, L. & Masciandaro, D. & Pansini, R.V., 2013. "The central banker as prudential supervisor: Does independence matter?," Journal of Financial Stability, Elsevier, vol. 9(3), pages 415-427.
    6. Klomp, Jeroen, 2010. "Causes of banking crises revisited," The North American Journal of Economics and Finance, Elsevier, vol. 21(1), pages 72-87, March.
    7. Albulescu, Claudiu Tiberiu, 2013. "Financial Stability and Monetary Policy: A Reduced-Form Model for the EURO Area," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(1), pages 62-81, March.
    8. Agustín Saade & Daniel Osorio & Dairo Estrada, 2007. "An equilibrium approach to financial stability analysis: the Colombian case," Annals of Finance, Springer, vol. 3(1), pages 75-105, January.

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