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

  • Ahrend, Rudiger

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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File URL: http://dx.doi.org/10.5018/economics-ejournal.ja.2010-12
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File URL: http://econstor.eu/bitstream/10419/30328/1/623833840.pdf
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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): ()
Pages: 1-30

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Handle: RePEc:zbw:ifweej:201012
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  1. 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.
  2. Nigel Pain & Isabell Koske & Marte Sollie, 2006. "Globalisation and Inflation in the OECD Economies," OECD Economics Department Working Papers 524, OECD Publishing.
  3. 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.
  4. John Taylor, 2007. "Housing and Monetary Policy," Discussion Papers 07-003, Stanford Institute for Economic Policy Research.
  5. Burkhard Drees & Ceyla Pazarbasioglu, 1998. "The Nordic Banking Crisis; Pitfalls in Financial Liberalization," IMF Occasional Papers 161, International Monetary Fund.
  6. Peter Hoeller & David Rae, 2007. "Housing Markets and Adjustment in Monetary Union," OECD Economics Department Working Papers 550, OECD Publishing.
  7. Rudiger Ahrend & Boris Cournède & Robert W.R. Price, 2008. "Monetary Policy, Market Excesses and Financial Turmoil," OECD Economics Department Working Papers 597, OECD Publishing.
  8. Oecd, 2006. "Are House Prices Nearing a Peak?: A Probit Analysis for 17 OECD Countries," OECD Economics Department Working Papers 488, OECD Publishing.
  9. 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.
  10. Rudiger Ahrend & Jens Arnold & Fabrice Murtin, 2009. "Prudential Regulation and Competition in Financial Markets," OECD Economics Department Working Papers 735, OECD Publishing.
  11. 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.
  12. 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.
  13. Ahrend, Rudiger & Arnold, Jens & Murtin, Fabrice, 2009. "Have more strictly regulated banking systems fared better during the recent financial crisis?," MPRA Paper 20135, University Library of Munich, Germany.
  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. 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.
  16. Detken, Carsten & Smets, Frank, 2004. "Asset price booms and monetary policy," Working Paper Series 0364, European Central Bank.
  17. 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.
  18. 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.
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