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Assessing the link between Price and Financial Stability

  • Christophe Blot

    (Observatoire français des conjonctures économiques)

  • Jérôme Creel

    (Observatoire français des conjonctures économiques)

  • Paul Hubert

    (Observatoire français des conjonctures économiques)

  • Fabien Labondance

    (Observatoire français des conjonctures économiques)

  • Francesco Saraceno

    (Observatoire français des conjonctures économiques)

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 the empirical appropriateness of the “leaning against the wind” monetary policy approach.

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Paper provided by Sciences Po in its series Sciences Po publications with number 2014-02.

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Date of creation: Feb 2014
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Handle: RePEc:spo:wpmain:info:hdl:2441/f6h8764enu2lskk9p4oqi4ibn
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