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  Financial Stability and Monetary Policy
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 Ophav:
Bertelsen , Simon 1, Forfatter
Bergman, Ulf Michael2, Vejleder
Tilknytninger:
1Det Samfundsvidenskabelige Fakultet, Københavns Universitet, København, Danmark, diskurs:7001              
2Økonomisk Institut, Det Samfundsvidenskabelige Fakultet, Københavns Universitet, København, Danmark, diskurs:7014              
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Indhold

Ukontrollerede emneord: Financial stability, monetary policy, CVAR model, U.S.
 Abstract: Since March 2007 the start of the recent financial crisis questions have been asked in relation to what caused the crisis. These questions are still not fully answered, however, many proposal have been giving. Taylor (2009) and Gordon (2009), based on the most recent and on going research, claim that it was due to incomplete actions and interventions by the U.S. government. Dokko et al. (2009) argues the opposite, and states that the Federal Reserve System (Fed) was well aligned with the goals of policymakers.
Whether or not actions by the U.S. government or the Fed caused the financial crisis, the affects from monetary policy on financial stability, if any, are unclear. Ferguson (2003, p.15) states that financial stability is and always will be of vital interest to central banks, however, most of the earlier literature examine the affects from price shocks on financial stability and not whether financial stability is affected by monetary policy at all, and if not, what does affect financial stability?
This thesis finds empirical evidence in support of that financial stability is affected by monetary policy, however, only when the monetary policy is conducted with a directly targeted instrument, where changes in the instrument are clearly and unmistakeably observable to the market. I further find that ease in the monetary policy in the long run has a negative affect on financial stability. I construct an index of financial instability represented by four measures of financial stability, following the method by Bordo et al. (2000, 2001), and apply the index in a four variable Cointegrated Vector Autoregression model (CVAR) with inflation, GDP and the Federal Reserves overnight interest rate as the remaining three variables. I use monthly observations of U.S. data covering a period from 1960 to 2007, however, divided into three monetary policy eras (MPE); 1960 to 1979, 1980 to 1986 and 1987 to 2007, based on the responsiveness of the interest rate to inflation and GDP, following the Taylor-rule, see Taylor (1999). I further apply Goodfriend (1991), who discuss the targeting procedure by the Fed when conducting the monetary policy. I mainly follow the method by Bergman and Hansen (2002) throughout the thesis.
The first part of the thesis is a theoretical framework consisting of section 2 and 3. The second part is the empirical methodology and work, where I apply the theory in section 4 and 5. In section 2 I define financial stability, examine how to measure financial stability and discuss monetary policy from the perspective of the Fed, including the Taylor rule. In section 3 I present the results from earlier literature on the subject. I define financial stability according to Schinasi (2004): “A financial system is in a range of stability whenever it is capable of facilitating (rather than impeding) the performance of an economy, and of dissipating financial imbalances that arise endogenously or as a result of significant adverse and unanticipated events.”The definition encompasses the purpose and essential elements of monetary policy set by the Fed: “..,to promote the objectives of maximum employment, stable prices, and moderate long-term interest rates...”
The measures are chosen on papers from central banks and the academic literature, and further to give an equal weight between micro and macro measures, in the way, that a micro measure has an more immediate affect than a macro, which might be lagged several time periods.
In the empirical part, I start with a discussion of the methodology in section 4 and continue the empirical work with the data in section 5.
I apply a CVAR as all of the variables are non-stationary. The data is far from normal distributed, why I apply several dummies to achieve well-specified CVAR models. In order to examine whether financial stability is affected by monetary policy I apply a Granger non-causality test both as block exogeneity and directly between the two variables.
Section 6 is the discussion of my results both in relation to individual monetary policy eras but also in relation to earlier results. The results in three MPEs are differs and for the majority, they also differs from earlier results. I end my discussion with a critical evaluation on my construction of the financial instability index and the data. In my conclusion I also discuss the perspective of my results in relation to the impacts on national policy when global spill over effects occurs.
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Copyright dato:
22012-06-11
Copyright information:
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Bogmærk denne post: https://diskurs.kb.dk/item/diskurs:31102:2
 Type: Speciale
Alternativ titel: An empirical analysis of U.S. data
Alternativ titel: Finansiel Stabilitet og Penge Politik
Alternativ titel: En empirisk analyse af amerikanske data
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Detaljer

Sprog: English - eng
 Datoer: 2012-01-06
 Sider: -
 Publiceringsinfo: København : Københavns Universitet
 Indholdsfortegnelse: 1 INTRODUCTION . 2
2 THEORETICAL FRAMEWORK 7
2.1 DEFINING FINANCIAL STABILITY 7
2.2 MEASURING FINANCIAL STABILITY 13
2.3 MONETARY POLICY . 27
2.4 SUMMARY OF THE THEORETICAL FRAMEWORK 29
3 EARLIER LITERATURE . 30
4 EMPIRICAL METHODOLOGY 32
4.1 STABLE VAR MODEL 32
4.2 NON-STATIONARITY AND COINTEGRATION 34
4.3 HOW TO TEST FOR NON-STATIONARITY AND COINTEGRATION . 36
4.4 GRANGER NON-CAUSALITY TESTING 38
4.5 WALKTHROUGH OF THE DIAGNOSTIC TESTS APPLIED IN THE SPECIFICATION 40
5 EMPIRICAL WORK . 42
5.1 DATA 42
5.2 SPECIFICATION, ESTIMATION AND ANALYSIS 48
5.2.1 MONETARY POLICY ERA 1 (1960:1 – 1979:12) 48
5.2.2 MONETARY POLICY ERA 2 (1980:1 – 1986:12) 55
5.2.3 MONETARY POLICY ERA 3 (1987:1 – 2007:12) 59
5.3 SUMMARY OF THE RESULTS FROM THE THREE MONETARY POLICY ERAS 63
6 DISCUSSION . 64
6.1 THE THEORY AND THE EMPIRICAL RESULTS 64
6.2 THE EMPIRICAL RESULTS VERSUS EARLIER LITERATURE 66
6.3 CRITICAL EVALUATION OF THE RESULTS . 68
7 CONCLUSION . 69
8 BIBLIOGRAPHY . 71
9 APPENDICIES . 77
APPENDIX 1 . 77
APPENDIX 2 . 79
APPENDIX 3 . 80
APPENDIX 4 . 83
APPENDIX 5 . 84
APPENDIX 6 . 85
APPENDIX 7 . 86
APPENDIX 8 . 88
APPENDIX 9 . 90
 Note: -
 Type: Speciale
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