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Assessing the Link between Price and Financial Stability

  • Christophe Blot

    (OFCE - Sciences Po)

  • Jerome Creel

    (OFCE - Sciences Po, and ESCP Europe)

  • Paul Hubert

    (OFCE - Sciences Po)

  • Fabien Labondance

    (OFCE - Sciences Po)

  • Francesco Saraceno

    (OFCE - Sciences Po, and LUISS)

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 about the empirical appropriateness of the "leaning against the wind" monetary policy approach.

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File URL: http://fessud.eu/wp-content/uploads/2013/04/Assessing-the-link-between-price-and-financial-stability-Working-Paper-no.-33.pdf
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Paper provided by Financialisation, Economy, Society & Sustainable Development (FESSUD) Project in its series Working papers with number wpaper33.

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Length: 41 pages
Date of creation: 01 Feb 2013
Date of revision:
Handle: RePEc:fes:wpaper:wpaper33
Contact details of provider: Postal: FESSUD Co-ordinator (Malcolm Sawyer) Leeds University Business School Maurice Keyworth Buidling Leeds LS2 9JT

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  1. Anna Creti & Marc Joëts & Valérie Mignon, 2012. "On the links between stock and commodity markets' volatility," Working Papers 2012-20, CEPII research center.
  2. Allen, William A. & Wood, Geoffrey, 2006. "Defining and achieving financial stability," Journal of Financial Stability, Elsevier, vol. 2(2), pages 152-172, June.
  3. John B. Taylor, 2009. "The Financial Crisis and the Policy Responses: An Empirical Analysis of What Went Wrong," NBER Working Papers 14631, National Bureau of Economic Research, Inc.
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  5. Disyatat, Piti, 2010. "Inflation targeting, asset prices, and financial imbalances: Contextualizing the debate," Journal of Financial Stability, Elsevier, vol. 6(3), pages 145-155, September.
  6. Borio, Claudio, 2014. "The financial cycle and macroeconomics: What have we learnt?," Journal of Banking & Finance, Elsevier, vol. 45(C), pages 182-198.
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  8. William R. White, 2006. "Is price stability enough?," BIS Working Papers 205, Bank for International Settlements.
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  10. Yang, Jian & Zhou, Yinggang & Wang, Zijun, 2009. "The stock-bond correlation and macroeconomic conditions: One and a half centuries of evidence," Journal of Banking & Finance, Elsevier, vol. 33(4), pages 670-680, April.
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  12. Philip Lowe & Claudio Borio, 2002. "Asset prices, financial and monetary stability: exploring the nexus," BIS Working Papers 114, Bank for International Settlements.
  13. Michael Woodford, 2012. "Inflation Targeting and Financial Stability," NBER Working Papers 17967, National Bureau of Economic Research, Inc.
  14. Haroon Mumtaz & Paolo Surico, 2012. "Evolving International Inflation Dynamics: World And Country-Specific Factors," Journal of the European Economic Association, European Economic Association, vol. 10(4), pages 716-734, 08.
  15. 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.
  16. William R. White & Claudio E. V. Borio, 2004. "Whither monetary and financial stability? the implications of evolving policy regimes," BIS Working Papers 147, Bank for International Settlements.
  17. Michael D. Bordo & David C. Wheelock, 1998. "Price stability and financial stability: the historical record," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 41-62.
  18. Cai, Yijie & Chou, Ray Yeutien & Li, Dan, 2009. "Explaining international stock correlations with CPI fluctuations and market volatility," Journal of Banking & Finance, Elsevier, vol. 33(11), pages 2026-2035, November.
  19. Jérôme Creel & Paul Hubert & Fabien Labondance, 2013. "Financial stability and economic performance," Sciences Po publications 2013-24, Sciences Po.
  20. Holló, Dániel & Kremer, Manfred & Lo Duca, Marco, 2012. "CISS - a composite indicator of systemic stress in the financial system," Working Paper Series 1426, European Central Bank.
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