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Title: Getting in all the cracks: Monetary policy and indicators of financial stability Authors:  Andrea Ajello - Board of Governors of the Federal Reserve System (United States) [presenting]
Abstract: The purpose is to study the effect of monetary policy surprises on aggregate economic activity, price dynamics, and a wide array of measures of financial vulnerability. We do so by building a monetary proxy dynamic factor model (proxy DFM), in which the policy rate, prices, and aggregate activity dynamics interact with measures of asset valuation pressure, and indicators of vulnerability stemming from the financial and non-financial sectors. We find that monetary policy shocks have pervasive effects on financial vulnerability. On the wake of a surprise monetary policy tightening, asset valuations drop on impact and credit standards tighten in the short-to-medium run. While aggregate activity contracts and inflation pressure subsides, measures of debt sustainability and leverage of risky borrowers deteriorate.