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Financial Instability and Monetary Policy: The Swedish Evidence

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  • Bergman, U. Michael

    ()
    (Department of Economics, Lund University)

  • Hansen, Jan

    ()
    (Research Department, Central Bank of Sweden)

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    Abstract

    This paper examines the relationship between financial instability and monetary policy within the Swedish economy. Based on a standard VAR model of monetary policy extended to include measures of financial instability and credit expansions, we examine the interaction between monetary policy and financial stability. We find that both higher interest rates, higher prices and lending expansions contribute to financial instability. As the effects from price shocks are strong and persistent compared to other shocks, our conclusion is that we cannot reject that price stability and financial stability are mutually consistent goals for monetary policy.

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    Bibliographic Info

    Paper provided by Sveriges Riksbank (Central Bank of Sweden) in its series Working Paper Series with number 137.

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    Length: 41 pages
    Date of creation: 01 Jun 2002
    Date of revision:
    Handle: RePEc:hhs:rbnkwp:0137

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    Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
    Phone: 08 - 787 00 00
    Fax: 08-21 05 31
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    Web page: http://www.riksbank.com/
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    Related research

    Keywords: Financial instability; monetary policy; VAR model; structural shocks;

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    References

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    1. Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 27-48, Fall.
    2. Bean, Charles, 1998. "Monetary Policy under EMU," Oxford Review of Economic Policy, Oxford University Press, vol. 14(3), pages 41-53, Autumn.
    3. Ben Bernanke & Mark Gertler, 1999. "Monetary policy and asset price volatility," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 77-128.
    4. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-38, July.
    5. Michael D. Bordo & David C. Wheelock, 1998. "Price stability and financial stability: the historical record," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 41-62.
    6. Marvin Goodfriend, 2001. "Financial stability, deflation, and monetary policy," Working Paper 01-01, Federal Reserve Bank of Richmond.
    7. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1998. "Monetary Policy Shocks: What Have We Learned and to What End?," NBER Working Papers 6400, National Bureau of Economic Research, Inc.
    8. Warne, A. & Bergman, M., 1993. "Money-Income Causality and the Neutrality of Money," Papers 557, Stockholm - International Economic Studies.
    9. Allen, Franklin & Gale, Douglas, 2000. "Bubbles and Crises," Economic Journal, Royal Economic Society, vol. 110(460), pages 236-55, January.
    10. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
    11. Allen, Franklin & Gale, Douglas, 1999. "Bubbles, Crises, and Policy," Oxford Review of Economic Policy, Oxford University Press, vol. 15(3), pages 9-18, Autumn.
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    Cited by:
    1. Hansen, Jan, 2003. "Financial Cycles and Bankruptcies in the Nordic Countries," Working Paper Series 149, Sveriges Riksbank (Central Bank of Sweden).

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