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A Peer-reviewed scientific articles/A1 Journal article (refereed), original research
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Monetary Policy, Private Debt and Financial Stability Risks, International Journal of Central Banking 3/ September (2017). Granziera, Eleonora; Bauer, Gregory H.

Category A Peer-reviewed scientific articles
Sub-category A1 Journal article (refereed), original research
auki Internal authors
Granziera Eleonora / Research
All authors as text Granziera, Eleonora; Bauer, Gregory H. 
Number of authors
Status Published
Year of publication 2017 
Date 15.09.2017 
Name of article Monetary Policy, Private Debt and Financial Stability Risks 
Name of journal International Journal of Central Banking
Volume of issue 13 
Number of issue 3/ September 
Pages 337-373 
Abstract Can monetary policy be used to promote financial stability? We answer this question by estimating the impact of a monetary policy shock on private-sector leverage and the likelihood of a financial crisis. Impulse responses obtained from a panel VAR model of eighteen advanced countries suggest that the debt-to-GDP ratio rises in the short run following an unexpected tightening in monetary policy. As a consequence, the likelihood of a financial crisis increases, as estimated from a panel logit regression. However, in the long run, output recovers and higher borrowing costs discourage new lending, leading to a deleveraging of the private sector. A lower debt-to-GDP ratio in turn reduces the likelihood of a financial crisis. These results suggest that monetary policy can achieve a less risky financial system in the long run but could fuel financial instability in the short run. We also find that the ultimate effects of a monetary policy tightening on the probability of a financial crisis depend on the leverage of the private sector: the higher the initial value of the debt-to-GDP ratio, the more beneficial the monetary policy intervention in the long run, but the more destabilizing in the short run.
Free text descriptor in Finnish rahapolitiikka; rahoitusmarkkinat; vakaus; kriisit; riskit; 
JEL-codes E52, E58, C21, C23 
ISSN / e-ISSN 1815-4654 
auki Internet addresses
Open Access Open access -publication