Template-Type: ReDIF-Paper 1.0
Author-Name: Andrew Filardo
Author-X-Name-First: Andrew
Author-X-Name-Last: Filardo
Author-Name: Paul Hubert 
Author-X-Name-First: Paul 
Author-X-Name-Last: Hubert 
Author-Name: Phurichai Rungcharoenkitkul
Author-X-Name_First: Phurichai 
Author-X-Name-Last: Rungcharoenkitkul
Title: The reaction function channel of monetary policy and the financial cycle
Abstract: This paper examines whether monetary policy reaction function matters for financial stability. We measure how responsive the Federal Reserve's policy appears to be to imbalances in the equity, housing and credit markets. We find that changes in these policy sensitivities predict the later development of financial imbalances. When monetary policy appears to respond more countercyclically to market overheating, imbalances tend to decline over time. This effect is distinct from that of current and anticipated interest rate levels - the risk-taking channel. The evidence highlights the importance of a "policy reaction function" channel of monetary policy in shaping the financial cycle.
Length: 42 pages
Creation-Date: 2019-10
File-URL: https://www.bis.org/publ/work816.pdf
File-Format: Application/pdf
File-Function: Full PDF document
File-URL: https://www.bis.org/publ/work816.htm
File-Format: text/html
Number: 816
Classification-JEL: E50, E52, G00, G01, G12
Keywords: policy reaction function channel, asset price booms, credit booms, monetary policy, financial cycles, time-varying models
Handle: RePEc:bis:biswps:816