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Discussion Paper

No. 2008-44 | December 18, 2008
Monetary Ease – A Factor behind Financial Crises? Some Evidence from OECD Countries

Abstract

This paper addresses the question of whether and how easy monetary policy may lead to excesses in financial and real asset markets and ultimately result in financial dislocation. It presents evidence suggesting that periods when short-term interest rates have been persistently and significantly below what Taylor rules would prescribe are correlated with increases in asset prices, especially as regards housing, though no systematic effects are identified on equity markets. Significant asset price increases, however, can also occur when interest rates are in line with Taylor rules, associated with periods of financial deregulation and/or innovation. The paper argues that accommodating monetary policy over the period 2002-2005, in combination with rapid financial market innovation, would seem in retrospect to have been among the factors behind the run-up in asset prices and financial imbalances -- the (partial) unwinding of which helped trigger the 2007/08 financial market turmoil.

JEL Classification

E44 E5 F3 G15

Cite As

Rudiger Ahrend (2008). Monetary Ease – A Factor behind Financial Crises? Some Evidence from OECD Countries. Economics Discussion Papers, No 2008-44, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2008-44

Assessment



Comments and Questions


Anonymous - Referee Report
January 16, 2009 - 10:02

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Anonymous - Referee Report
February 23, 2009 - 10:25

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Anonymous - Referee Report
February 23, 2009 - 10:26

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