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Implications of the design of monetary policy for financial stability

  • 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://128.118.178.162/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
Date of revision:
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://128.118.178.162

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  1. Ben Bernanke & Mark Gertler, 1999. "Monetary policy and asset price volatility," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 77-128.
  2. Cukierman Alex, 1992. "Central Bank Strategy, Credibility, And Independance: Theory And Evidence," Journal des Economistes et des Etudes Humaines, De Gruyter, vol. 3(4), pages 10, December.
  3. Carmen M. Reinhart & Kenneth S. Rogoff, 2002. "The Modern History of Exchange Rate Arrangements: A Reinterpretation," NBER Working Papers 8963, National Bureau of Economic Research, Inc.
  4. Jeffrey Sachs & Aaron Tornell & Andres Velasco, 1996. "Financial Crises in Emerging Markets: The Lessons from 1995," Harvard Institute of Economic Research Working Papers 1759, Harvard - Institute of Economic Research.
  5. Cukierman, A. & Miller, G.P. & Neyapti, B., 2000. "Central Bank Rerform, Liberalization and Inflation in Transition Economies - an International Perspective," Papers 00-19, Tel Aviv.
  6. Jeffrey A. Frankel & Andrew K. Rose, 1996. "Currency crashes in emerging markets: an empirical treatment," International Finance Discussion Papers 534, Board of Governors of the Federal Reserve System (U.S.).
  7. Cukierman, Alex & Webb, Steven B & Neyapti, Bilin, 1992. "Measuring the Independence of Central Banks and Its Effect on Policy Outcomes," World Bank Economic Review, World Bank Group, vol. 6(3), pages 353-98, September.
  8. Domac, Ilker & Martinez-Peria, Maria Soledad, 2000. "Banking crises and exchange rate regimes - Is there a link?," Policy Research Working Paper Series 2489, The World Bank.
  9. Viñals, José, 2001. "Monetary Policy Issues in a Low Inflation Environment," CEPR Discussion Papers 2945, C.E.P.R. Discussion Papers.
  10. Gourinchas, Pierre-Olivier & Landerretche, Oscar & Valdés, Rodrigo, 2001. "Lending Booms: Latin America and the World," CEPR Discussion Papers 2811, C.E.P.R. Discussion Papers.
  11. José Viñals, 2001. "Monetary Policy Issues in a Low Inflation Environment," Banco de Espa�a Working Papers 0107, Banco de Espa�a.
  12. Frederic S. Mishkin, 1996. "Understanding Financial Crises: A Developing Country Perspective," NBER Working Papers 5600, National Bureau of Economic Research, Inc.
  13. Michael Gavin & Ricardo Hausmann, 1996. "The Roots of Banking Crises: The Macroeconomic Context," IDB Publications (Working Papers) 5819, Inter-American Development Bank.
  14. Andrew Berg & Paolo Mauro & Eduardo Borensztein, 2002. "An Evaluation of Monetary Regime Options for Latin America," IMF Working Papers 02/211, International Monetary Fund.
  15. Alina Carare & Mark R. Stone, 2003. "Inflation Targeting Regimes," IMF Working Papers 03/9, International Monetary Fund.
  16. Martinez Peria, Maria Soledad, 2000. "The impact of banking crises on money demand and price stability," Policy Research Working Paper Series 2305, The World Bank.
  17. Michael D. Bordo & Bruce Mizrach & Anna J. Schwartz, 1995. "Real Versus Pseudo-International Systemic Risk: Some Lessons from History," NBER Working Papers 5371, National Bureau of Economic Research, Inc.
  18. Kuttner, Kenneth N & Posen, Adam S, 2001. "Beyond Bipolar: A Three-Dimensional Assessment of Monetary Frameworks," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 6(4), pages 369-87, October.
  19. Michael D. Bordo & Antu P. Murshid, 2000. "Are Financial Crises Becoming Increasingly More Contagious? What is the Historical Evidence on Contagion?," NBER Working Papers 7900, National Bureau of Economic Research, Inc.
  20. Asli Demirgüç-Kunt & Enrica Detragiache, 2000. "Does Deposit Insurance Increase Banking System Stability?," IMF Working Papers 00/3, International Monetary Fund.
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