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A0201
Title: Threshold Effects of Financial Stress on Monetary Policy Rules: A panel data analysis Authors:  Danvee Floro - University of Kiel (Germany) [presenting]
Bjoern van Roye - European Central Bank (Germany)
Abstract: This study tests for the state-dependent response of monetary policy to increases inoverall financial stress and financial sector-specific stress across a panel of advancedand emerging economy central banks. We use a Factor-Augmented Dynamic PanelThreshold regression model with (estimated) common components in order to deal with cross-sectional dependence. We find strong evidence of state-dependence in theresponse of monetary policy to financial sector-specific stress. On the one hand, advanced economy central banks pursue aggressive monetary policy loosening in responseto stock market and banking stress only in times of high financial market volatility. On the other hand, emerging market central banks' monetary policy responses are changing over time. Monetary policy is accommodative in the face of stock market stress, but this evidence disappears in the post-2001 period. Instead, the focus of the tightening response is shifted to banking and exchange rate stresses, both of which are found to be sensitive to the augmentation of common components.