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Financial stability and the design of monetary policy

  • Alicia García Herrero

    ()

    (Banco de España)

  • Pedro del Río

    ()

    (Banco de España)

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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Paper provided by Banco de España & Working Papers Homepage in its series 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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