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Implications of the design of monetary policy for financial stability

Listed author(s):
  • Alicia García Herrero

    (Banco de España)

  • Pedro del Río López

    (Banco de España)

This paper is a contribution to the literature on the factors behind financial stability, focusing on monetary policy design. In particular, it assesses empirically for a sample of 79 countries in the period 1970 to 2000 whether the choice of the central bank objectives and the monetary policy strategy affect financial stability. We find that focusing the central bank objectives on price stability reduces the likelihood of a banking crisis. This result is robust to several model specifications and groups of countries. As regards the monetary policy strategy, exchange rate targeting significantly reduces the likelihood of a banking crisis for some model specifications and, in particular, for the group of countries in transition.

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File URL: http://econwpa.repec.org/eps/mac/papers/0304/0304008..pdf
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Paper provided by EconWPA in its series Macroeconomics with number 0304008.

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Length: 34 pages
Date of creation: 21 Apr 2003
Handle: RePEc:wpa:wuwpma:0304008
Note: Type of Document - Acrobat PDF; prepared on PC; to print on HP; pages: 34 ; figures: included
Contact details of provider: Web page: http://econwpa.repec.org

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  1. Michael Gavin & Ricardo Hausmann, 1996. "The Roots of Banking Crises: The Macroeconomic Context," Research Department Publications 4026, Inter-American Development Bank, Research Department.
  2. Domac, Ilker & Martinez Peria, Maria Soledad, 2003. "Banking crises and exchange rate regimes: is there a link?," Journal of International Economics, Elsevier, vol. 61(1), pages 41-72, October.
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  15. Jeffrey D. Sachs & Aaron Tornell & Andrés Velasco, 1996. "Financial Crises in Emerging Markets: The Lessons from 1995," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(1), pages 147-216.
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  17. Frankel, Jeffrey A. & Rose, Andrew K., 1996. "Currency crashes in emerging markets: An empirical treatment," Journal of International Economics, Elsevier, vol. 41(3-4), pages 351-366, November.
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