Macquarie University
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Monetary policy and financial stability: a vector autoregressive approach

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posted on 2022-03-28, 13:17 authored by Callum Morgan
Applying vector autoregression (VAR) techniques, this paper investigates the effects of monetary policy on financial stability in the United States, using monthly data for 1990-2014. Alternative indicators of monetary policy are used to assess the dynamic responses of a key set of financial stability variables. By building upon a disaggregation made in the literature, the financial stability transmission channels of monetary policy are also analysed. This study finds that the net effect of monetary policy on financial stability is rather small. Weak evidence is found for the hypothesis that monetary expansions contribute to financial vulnerabilities; or conversely, that monetary contractions reduce vulnerabilities. However, evidence is found that suggests monetary contractions deteriorate financial conditions as well. In addition, the effects of monetary policy on financial stability are found not to be uniform across transmission channels. In particular, little evidence was found for a financial instability channel in asset markets, while the shadow banking sector displayed the most significant evidence. Overall, these results lend support to a policy framework where monetary policy primarily targets price stability and macroprudential policies target financial stability.


Table of Contents

1. Introduction and motivation -- 2. Literature review -- 3. Methodology -- 4. Results and discussion -- 5. Conclusion.


Theoretical thesis. Bibliography: pages 87-93

Awarding Institution

Macquarie University

Degree Type

Thesis MRes


MRes, Macquarie University, Faculty of Business and Economics, Department of Economics

Department, Centre or School

Department of Economics

Year of Award


Principal Supervisor

Natalia Ponomareva

Additional Supervisor 1

Roselyne Joyeux


Copyright Callum Morgan 2015. Copyright disclaimer:




United States


1 online resource (93 pages)

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