Abstract
We assess whether monetary policymakers follow systemic risk in adjusting monetary policy for the US. over a period spanning from 1960 to 2011. We evaluate the reactions of monetary policy variables during the corresponding periods of high and low systemic risk. We estimate a threshold Vector Autoregressive (VAR) model and provide evidence that U.S. monetary policy is affected by systemic risk measured by CATFIN proposed by Allen et al. (Review of Financial Studies 25(10): 3000–3036, 2012). This effect is asymmetric between periods of high systemic risk and periods of low systemic risk. The threshold value of CATFIN is in the area of 0.048–0.054. Our results support the monitoring of CATFIN by the monetary authorities, as an effective proxy of financial fragility to be included in the monetary policy strategy.
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Notes
- 1.
In the present analysis, we consider the nonparametric method, in line with Giglio et al. (2016).
- 2.
The Fred codes are: FEDFUNDS for the federal funds rate, M1SL for M1, and MABMM301USM189S for M3.
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Appendix
Appendix
Data
Response of monetary policy variables to CATFIN. (a) Response of change in effective funds rate (“dpolicyrate”). (b) Change in log M1 (“dlM1”). (c) Change in log M3 (“dlM3”)
Periods when CATFIN exceeded 0.048
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Kokores, I.T., Kanas, A. (2021). Monetary Policy and Systemic Risk: U.S. Evidence. In: Kokores, I.T., Pantelidis, P., Pelagidis, T., Yannelis, D. (eds) Money, Trade and Finance. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-73219-6_7
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DOI: https://doi.org/10.1007/978-3-030-73219-6_7
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