قوانین سیاست پولی و استرس مالی با متغیر زمان: آیا بی ثباتی مالی برای سیاست پولی مهم است؟

We examine whether and how selected central banks responded to episodes of financial stress over the last three decades. We employ a recently developed monetary-policy rule estimation methodology which allows for time-varying response coefficients and corrects for endogeneity. This flexible framework applied to the USA, the UK, Australia, Canada, and Sweden, together with a new financial stress dataset developed by the International Monetary Fund, not only allows testing of whether central banks responded to financial stress, but also detects the periods and types of stress that were the most worrying for monetary authorities and quantifies the intensity of the policy response. Our findings suggest that central banks often change policy rates, mainly decreasing them in the face of high financial stress. However, the size of the policy response varies substantially over time as well as across countries, with the 2008–2009 financial crisis being the period of the most severe and generalized response. With regard to the specific components of financial stress, most central banks seemed to respond to stock-market stress and bank stress, while exchange-rate stress is found to drive the reaction of central banks only in more open economies.

The recent financial crisis has intensified the interest in exploring the interactions between monetary policy and financial stability. Official interest rates were driven sharply to historical lows, and many unconventional measures were used to pump liquidity into the international financial system. Central banks pursued monetary policy under high economic uncertainty coupled with large financial shocks in many countries. The financial crisis also raised new challenges for central bank policies, in particular the operationalization of issues related to financial stability for monetary-policy decision making (Goodhart, 2006 and Borio and Drehmann, 2009). This paper seeks to analyze whether and how monetary policy interest rates evolved in response to financial instability over the last three decades. The monetary policies of central banks are likely to react to financial instability in a non-linear way (Goodhart et al., 2009). When a financial system is stable, the interest-rate-setting process largely reflects macroeconomic conditions, and financial stability considerations enter monetary policy discussions only to a limited degree. On the other hand, central banks may alter their monetary policies to reduce financial imbalances if these become severe. In this respect, Mishkin (2009) questions the traditional linear-quadratic framework1 when financial markets are disrupted and puts forward an argument for replacing it with non-linear dynamics describing the economy and a non-quadratic objective function resulting in non-linear optimal policy. To address the complexity of the nexus between monetary policy and financial stability as well as to evaluate monetary policy in a systematic manner, this paper employs the recently developed time-varying parameter estimation of monetary-policy rules, appropriately accounting for endogeneity in policy rules. This flexible framework, together with a new comprehensive financial stress dataset developed by the International Monetary Fund, will allow not only testing of whether central banks responded to financial stress, but also quantification of the magnitude of this response and detection of the periods and types of stress that were the most worrying for monetary authorities. Although theoretical studies disagree about the role of financial instability for central banks’ interest-rate-setting policies, our empirical estimates of the time-varying monetary-policy rules of the US Fed, the Bank of England (BoE), the Reserve Bank of Australia (RBA), the Bank of Canada (BoC), and Sveriges Riksbank (SR) show that central banks often alter the course of monetary policy in the face of high financial stress, mainly by decreasing policy rates.2 However, the size of this response varies substantially over time as well as across countries. There is some cross-country and time heterogeneity as well when we examine central banks’ considerations of specific types of financial stress: most of them seemed to respond to stock-market stress and bank stress, and exchange-rate stress drives central bank reactions only in more open economies. The paper is organized as follows. Section 2 discusses related literature. Section 3 describes our data and empirical methodology. Section 4 presents our results. Section 5 concludes. An appendix with a detailed description of the methodology and additional results follows.

The 2008–2009 global financial crisis generated significant interest in exploring the interactions between monetary policy and financial stability. This paper aimed to examine in a systematic manner whether and how the monetary policy of selected main central banks (the US Fed, the Bank of England, the Reserve Bank of Australia, the Bank of Canada, and Sveriges Riksbank) responded to episodes of financial stress over the last three decades. Instead of using individual alternative measures of financial stress in different markets, we employed the comprehensive indicator of financial stress recently developed by the International Monetary Fund, which tracks overall financial stress as well as its main subcomponents, in particular banking stress, stock-market stress and exchange-rate stress. Unlike a few existing empirical contributions that aim to evaluate the impact of financial-stability concerns on monetary policy making, we adopt a more flexible methodology that not only allows for the response to financial stress (and other macroeconomic variables) to change over time, but also addresses potential endogeneity (Kim and Nelson, 2006). The main advantage of this framework is that it not only enables testing of whether central banks responded to financial stress at all, but also detects the periods and types of stress that were the most worrying for monetary authorities. Our results indicate that central banks truly change their policy stances in the face of financial stress, but the magnitude of such responses varies substantially over time. As expected, the impact of financial stress on interest-rate setting is essentially zero most of the time, when the levels of stress are very moderate. However, most central banks loosen monetary policy when the economy faces high financial stress. There is some cross-country and time heterogeneity when we examine central banks’ considerations of specific types of financial stress. While most central banks seem to respond to stock-market stress and bank stress, exchange-rate stress is found to drive the reaction of central banks only in more open economies Consistent with our expectations, the results indicate that a sizeable fraction of the monetary-policy easing during the 2008–2009 financial crisis can be explained by a direct response to the financial stress above what might be attributed to the decline in inflation expectations and output below its potential. However, the size of the financial-stress effect differs by country. The result suggests that all central banks except the Bank of England kept their policy rates at 50–100 basis points lower, on average, solely due to the financial stress present in the economy. Interestingly, the size of this effect for the UK is assessed at about three times stronger (i.e., 250 basis points). This implies that about 50% of the overall policy-rate decrease during the recent financial crisis was motivated by financial-stability concerns in the UK (10%–30% in the remaining sample countries), while the remaining half falls to unfavorable developments in domestic economic activity. For the US Fed, macroeconomic developments themselves (a low-inflation environment and output substantially below its potential) explain the majority of the interest-rate policy decreases during the crisis, leaving any further response to financial stress to be constrained by zero interest rates. Overall, our results point to the usefulness of augmenting the standard version of monetary-policy rules by some measure of financial conditions to obtain a better understanding of the interest-rate-setting process, especially when financial markets are unstable. The empirical results suggest that the central banks considered in this study altered the course of their monetary policy in the face of financial stress. The recent crisis seems truly to be an exceptional period, in the sense that the response to financial instability was substantial and coincided in all the countries analyzed, which is evidently related to intentional policy coordination absent in previous decades. However, we have also observed that previous idiosyncratic episodes of financial distress were, at least in some countries, followed by monetary-policy responses of similar, if not higher, magnitude.