173x Filetype PDF File size 1.58 MB Source: www.imf.org
MONETARY POLICY AND FINANCIAL STABILITY September 2015 IMF staff regularly produces papers proposing new IMF policies, exploring options for reform, or reviewing existing IMF policies and operations. The following document(s) have been released and are included in this package: The Staff Report prepared by IMF staff and completed on August 28, 2015. Informal Session to Engage: The report prepared by IMF staff has benefited from comments and suggestions by Executive Directors following the informal session on September 14, 2015. Such informal sessions are used to brief Executive Directors on policy issues and to receive feedback from them in preparation for a formal consideration at a future date. No decisions are taken at these informal sessions. The views expressed in this paper are those of the IMF staff and do not necessarily represent the views of the IMF's Executive Board. The IMF’s transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities’ policy intentions in published staff reports and other documents. Electronic copies of IMF Policy Papers are available to the public from http://www.imf.org/external/pp/ppindex.aspx International Monetary Fund Washington, D.C. © 2015 International Monetary Fund MONETARY POLICY AND FINANCIAL STABILITY August 28, 2015 EXECUTIVE SUMMARY The issue of using monetary policy for financial stability purposes is hotly contested. The crisis was a reminder that price stability is not sufficient for financial stability, financial crises are costly, and policy should aim to decrease the likelihood of crises, not only rely on dealing with their repercussions once they occur. It is clear that well-targeted prudential policies (including micro and macroprudential regulation and supervision) should be pursued actively to attenuate the buildup of financial risks. The question is whether monetary policy should be altered to contain financial stability risks. Should it lend a hand by temporarily raising interest rates more than warranted by price and output stability objectives? Keeping rates persistently higher is also possible, but more costly. Based on our current knowledge, and in present circumstances, the answer is generally no. But, the door should remain open as our knowledge of the relationship between monetary policy and financial risks evolves and circumstances change. In principle, monetary policy should deviate from its traditional response only if costs are smaller than benefits (the principle of doing no harm on net). Costs arise in the short term, from lower output and inflation. Benefits materialize mainly in the medium term, as financial risks are mitigated, though effects are more uncertain. Based on current knowledge, the case for leaning against the wind is limited, as in most circumstances costs outweigh benefits. However, our current understanding of the channels through which monetary policy affects financial stability domestically, across borders, and over the business cycle is rapidly evolving. More circumstances may be uncovered in which deviations from a traditional policy response are warranted. Future research in this area is a key priority. In the interim, central banks should monitor and openly discuss financial stability risks, and carefully consider the costs and benefits of potential action. MONETARY POLICY AND FINANCIAL STABILITY Approved By Prepared by Karl Habermeier and Tommaso Mancini-Griffoli (MCM), José Viñals, Giovanni Dell’Ariccia (RES), and Vikram Haksar (SPR), under the Olivier Blanchard, and guidance of Dong He (MCM) and Tamim Bayoumi (SPR), along with a Siddharth Tiwari team comprising Machiko Narita, and Martin Saldias (MCM), Pau Rabanal and Damiano Sandri (RES), and Edouard Vidon, Ran Bi, Sally Chen, Shuntaro Hara, Stefan Laseen, Katsiaryna Svirydzenka, Ruud Vermeulen, and Aleksandra Zdzienicka (SPR), with research assistance provided by Zohair Alam (MCM), Federico Diaz Kalan (SPR), and Paola Ganum (RES), input from Nasha Ananchotikul, and Dulani Seneviratne (APD), Jiaqian Chen, Francesco Columba, and Thierry Tressel (EUR), Nicolas Blancher, Srobona Mitra, and Laura Valderrama (MCM), Benjamin Hunt, and Mika Kortelainen (RES), Filiz Unsal, Marzie Taheri Sanjani, and Sophia Zhang (SPR), and Andrea Pescatori and Jarkko Turunen (WHD). Discussions with Stephen Cecchetti, Jeremy Stein, and Lars Svensson are gratefully acknowledged. Assistance was provided by Sonia Echeverri and Adriana Rota (both MCM). CONTENTS Glossary __________________________________________________________________________________________ 4 INTRODUCTION AND MOTIVATION ___________________________________________________________ 5 THE POLICY CONTEXT AND DEFINITIONS ____________________________________________________ 10 STEP 1: TRANSMISSION _______________________________________________________________________ 13 A. Interest Rates and Financial Variables _________________________________________________________ 13 B. Financial Variables and Macroeconomic Conditions __________________________________________ 17 STEP 2: TRADEOFFS ____________________________________________________________________________ 19 STEP 3: WELFARE IMPLICATIONS _____________________________________________________________ 21 FURTHER CONSIDERATIONS __________________________________________________________________ 25 IMPLEMENTATION ISSUES ____________________________________________________________________ 28 CONCLUDING THOUGHTS _____________________________________________________________________ 29 References _______________________________________________________________________________________ 52 2 INTERNATIONAL MONETARY FUND MONETARY POLICY AND FINANCIAL STABILITY BOXES 1. Cycles in Financial Variables: Concepts and Measurement ____________________________________ 31 2. How Severe are the Tradeoffs Between Economic and Financial Stabilization? ________________ 32 3. The Effect of Monetary Policy on Default Rates _______________________________________________ 33 4. Effects of Prolonged Monetary Policy Accommodation on Financial Stability _________________ 35 5. Non-Linear Interaction Between Monetary Policy on Financial Stress _________________________ 37 6. Predicting Crises ______________________________________________________________________________ 39 7. Leaning Against the Wind in a Extended Inflation Targeting Framework ______________________ 41 8. Cross-Border Spillovers from Monetary Policy on Financial Stability __________________________ 42 FIGURES 1. Output Gaps, Core Inflation, and Financial Indicators Before the Crisis _________________________ 6 2. Growing Financial Vulnerabilities and Costs of the Crisis _______________________________________ 7 3. Dealing With Financial Stability Over the Cyclical Dimension: A Decision Tree ________________ 11 4. From Interest Rates to Macroeconomic Conditions ___________________________________________ 13 5. Credit Growth and the Probability of Banking Crises __________________________________________ 19 6. Economic Dynamics in AEs with Banking Crises in 2007–08 ___________________________________ 20 7. Welfare Gains from Leaning Against the Wind Versus Using __________________________________ 22 8. to Lean or not to Lean, Such are the Tradeoffs ________________________________________________ 23 TABLE 1. Illustrative Scenarios __________________________________________________________________________ 25 APPENDIX I. Past Policy Advice______________________________________________________________________________ 44 INTERNATIONAL MONETARY FUND 3
no reviews yet
Please Login to review.