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Does Prolonged Monetary Policy Easing Increase Financial Vulnerability?
Author: Stephen Cecchetti1, Mr. Tommaso Mancini Griffoli, and Mr. Machiko Narita
  • 1 https://isni.org/isni/0000000404811396, International Monetary Fund
Series:
IMF Working Papers
Volume/Issue:
Volume 2017: Issue 065
Language:
English
Publication Date:
24 Mar 2017
DOI:
https://doi.org/10.5089/9781475588644.001
ISBN:
9781475588644
ISSN:
1018-5941
Pages:
31
Keywords:
WP; monetary policy; monetary policy easing; interest rate; quarter; Banks; nonbank financial institutions; prolonged monetary policy easing; financial vulnerability; financial stability; risk-taking behavior; spillovers; nonbank leverage; asset-to-equity leverage ratio; monetary policy transmission mechanisms; financial institution leverage; leverage benchmark; monetary policy impulse; Financial sector risk; Investment banking; Asset management; Bond yields; Accommodative monetary policy; Global; Africa
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IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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Using firm-level data for approximately 1,000 bank and nonbank financial institutions in 22 countries over the past 15 years we study the impact of prolonged monetary policy easing on risk-taking behavior. We find that the leverage ratio, as well as other measures of firm-level vulnerability, increases for banks and nonbanks as domestic monetary policy easing persists. Cross-border effects are also notable. We find effects of roughly similar magnitude on foreign financial sector firms when the U.S. eases policy. Results appear robust to a variety of specifications, and to be non-linear, with risk-taking behavior rising most quickly at the onset of monetary policy easing.
Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund

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