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The reaction function channel of monetary policy and the financial cycle

Author

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  • Andrew Filardo
  • Paul Hubert
  • Phurichai Rungcharoenkitkul Author-X-Name_First: Phurichai

Abstract

This paper examines whether monetary policy reaction function matters for financial stability. We measure how responsive the Federal Reserve's policy appears to be to imbalances in the equity, housing and credit markets. We find that changes in these policy sensitivities predict the later development of financial imbalances. When monetary policy appears to respond more countercyclically to market overheating, imbalances tend to decline over time. This effect is distinct from that of current and anticipated interest rate levels - the risk-taking channel. The evidence highlights the importance of a "policy reaction function" channel of monetary policy in shaping the financial cycle.

Suggested Citation

  • Andrew Filardo & Paul Hubert & Phurichai Rungcharoenkitkul Author-X-Name_First: Phurichai, 2019. "The reaction function channel of monetary policy and the financial cycle," BIS Working Papers 816, Bank for International Settlements.
  • Handle: RePEc:bis:biswps:816
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    1. Christophe Blot & Paul Hubert & Fabien Labondance, 2020. "The asymmetric effects of monetary policy on stock price bubbles," Documents de Travail de l'OFCE 2020-12, Observatoire Francais des Conjonctures Economiques (OFCE).

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    More about this item

    Keywords

    policy reaction function channel; asset price booms; credit booms; monetary policy; financial cycles; time-varying models;
    All these keywords.

    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G00 - Financial Economics - - General - - - General
    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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