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Assessing the link between Price and Financial Stability

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  • Christophe Blot

    (OFCE)

  • Jérôme Creel

    (OFCE)

  • Fabien Labondance

    (Atelier de recherche sur la politique économique et la gestion des entreprises (ARPEGE))

  • Francesco Saraceno

    (OFCE)

  • Paul Hubert

Abstract

This paper aims at investigating first the (possibly time-varying) empirical relationship between the level and conditional variances of price and financial stability, and second, the effects of macro and policy variables on this relationship in the United States and the Eurozone. Three empirical methods are used to examine the relevance of A.J. Schwartz’s “conventional wisdom” that price stability would yield financial stability. Using simple correlations, VAR and Dynamic Conditional Correlations, we reject the hypothesis that price stability is positively correlated to financial stability. We then discuss the empirical appropriateness of the “leaning against the wind” monetary policy approach.

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Bibliographic Info

Paper provided by Sciences Po in its series Sciences Po publications with number 2014-02.

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Date of creation: Feb 2014
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Handle: RePEc:spo:wpmain:info:hdl:2441/f6h8764enu2lskk9p4oqi4ibn

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Keywords: Price stability; Financial stability; DCC-GARCH; VAR;

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  1. Antonakakis, Nikolaos, 2012. "Dynamic Correlations of Sovereign Bond Yield Spreads in the Euro zone and the Role of Credit Rating Agencies' Downgrades," MPRA Paper 43013, University Library of Munich, Germany.
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  18. Claudio Borio, 2012. "The financial cycle and macroeconomics: What have we learnt?," BIS Working Papers 395, Bank for International Settlements.
  19. Michael D. Bordo & David C. Wheelock, 1998. "Price stability and financial stability: the historical record," Review, Federal Reserve Bank of St. Louis, Federal Reserve Bank of St. Louis, issue Sep, pages 41-62.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Les enjeux du triple mandat de la BCE
    by Laurence Duboys Fresney in OFCE le blog on 2014-07-16 14:22:27
  2. Dealing with the ECB’s triple mandate
    by Laurence Duboys Fresney in OFCE le blog on 2014-07-18 10:34:37

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