Financial stability and monetary policy: a framework

The paper presents a stylised framework to analyse conditions under which monetary policy contributes to amplified movements in the housing market. Extending work by Hyun Shin (2005), the paper analyses self enforcing feedback mechanisms resulting in amplifier effects in a credit constrained economy. The paper characterizes conditions for asymmetric effects, causing systemic crises. By injecting liquidity, monetary policy can prevent a meltdown. Anticipating such a response, private agents are encouraged to take higher risks. Provision of liquidity works as a public good, but it may create potential conflicts with other policy objectives and may give incentives to build up leverage with a high systemic exposure to small probability events.

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Year of publication:	2007
Authors:	Illing, Gerhard
Publisher:	Munich : Center for Economic Studies and Ifo Institute (CESifo)
Subject:	Geldpolitik \| Immobilienfinanzierung \| Verschuldungsrestriktion \| Finanzmarktkrise \| Moral Hazard \| Theorie

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Series:	CESifo Working Paper ; 1971
Type of publication:	Book / Working Paper
Type of publication (narrower categories):	Working Paper
Language:	English
Other identifiers:	538096969 [GVK] hdl:10419/26016 [Handle]
Classification:	E44 - Financial Markets and the Macroeconomy ; G18 - Government Policy and Regulation
Source:	EconStor

Persistent link: https://www.econbiz.de/10010264110