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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 have been 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, associated with periods of financial deregulation and/or innovation. The paper argues that accommodating monetary policy over the period 2002-2005, in combination with rapid financial market innovation, would seem in retrospect to have been among the factors behind the run-up in asset prices and financial imbalances -- the (partial) unwinding of which helped trigger the 2007/08 financial market turmoil. --

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Bibliographic Info

Paper provided by Kiel Institute for the World Economy in its series Economics Discussion Papers with number 2008-44.

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Date of creation: 2008
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Handle: RePEc:zbw:ifwedp:7465

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

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References

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  1. 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.
  2. 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, vol. 18(5), pages 399-403.
  3. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
  4. Stephen G. Cecchetti, 2008. "Measuring the Macroeconomic Risks Posed by Asset Price Booms," NBER Chapters, in: Asset Prices and Monetary Policy, pages 9-43 National Bureau of Economic Research, Inc.
  5. Rudiger Ahrend & Jens Arnold & Fabrice Murtin, 2009. "Prudential Regulation and Competition in Financial Markets," OECD Economics Department Working Papers 735, OECD Publishing.
  6. 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.
  7. Burkhard Drees & Ceyla Pazarbasioglu, 1998. "The Nordic Banking Crisis," IMF Occasional Papers 161, International Monetary Fund.
  8. John B. Taylor, 2007. "Housing and Monetary Policy," NBER Working Papers 13682, National Bureau of Economic Research, Inc.
  9. Detken, Carsten & Smets, Frank, 2004. "Asset price booms and monetary policy," Working Paper Series 0364, European Central Bank.
  10. Del Negro, Marco & Otrok, Christopher, 2007. "99 Luftballons: Monetary policy and the house price boom across U.S. states," Journal of Monetary Economics, Elsevier, vol. 54(7), pages 1962-1985, October.
  11. 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.
  12. Nigel Pain & Isabell Koske & Marte Sollie, 2006. "Globalisation and Inflation in the OECD Economies," OECD Economics Department Working Papers 524, OECD Publishing.
  13. Rudiger Ahrend & Boris Cournède & Robert W.R. Price, 2008. "Monetary Policy, Market Excesses and Financial Turmoil," OECD Economics Department Working Papers 597, OECD Publishing.
  14. Rudiger Ahrend & Pietro Catte & Robert W.R. Price, 2006. "Factors Behind Low Long-Term Interest Rates," OECD Economics Department Working Papers 490, OECD Publishing.
  15. Oecd, 2006. "Are House Prices Nearing a Peak?: A Probit Analysis for 17 OECD Countries," OECD Economics Department Working Papers 488, OECD Publishing.
  16. 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.
  17. Peter Hoeller & David Rae, 2007. "Housing Markets and Adjustment in Monetary Union," OECD Economics Department Working Papers 550, OECD Publishing.
  18. 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.
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Citations

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Cited by:
  1. John B. Taylor, 2013. "International Monetary Coordination and the Great Deviation," NBER Working Papers 18716, National Bureau of Economic Research, Inc.
  2. Orlowski, Lucjan T., 2012. "Financial crisis and extreme market risks: Evidence from Europe," Review of Financial Economics, Elsevier, vol. 21(3), pages 120-130.
  3. 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, vol. 18(5), pages 399-403.
  4. John B. Taylor, 2012. "Monetary Policy Rules Work and Discretion Doesn’t: A Tale of Two Eras," Discussion Papers 11-019, Stanford Institute for Economic Policy Research.
  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 26, Kiel Institute for the World Economy (IfW).
  7. Landais, Bernard, 2009. "La politique monétaire et la crise
    [Monetary Policy and The Crisis]
    ," MPRA Paper 15652, University Library of Munich, Germany.
  8. Landais, Bernard, 2010. "The monetary origins of the financial and economic crisis," MPRA Paper 23769, University Library of Munich, Germany.
  9. John B. Taylor, 2013. "The Effectiveness of Central Bank Independence Versus Policy Rules," Discussion Papers 12-009, Stanford Institute for Economic Policy Research.

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