How risky is Monetary Policy? The Effect of Monetary Policy on Systemic Risk in the Euro Area

Georg Leitner, Manuel Zerobin, Teresa Hübel, Anna Wolfmayr

Publikation: Working/Discussion PaperWU Working Paper

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Abstract

This paper empirically investigates the effect of monetary policy on systemic risk within the Euro area. We estimate a Bayesian proxy-VAR where we exploit high-frequency identified monetary policy surprises for identification. Employing aggregate as well as market specific systemic risk measures, we provide novel evidence on the heterogeneous risk transmission of conventional and unconventional monetary policy on different financial markets. We find that expansionary conventional monetary policy, near term guidance and forward guidance decrease systemic risk whereas quantitative easing (QE) increases systemic risk. While the effects are qualitatively homogeneous for near term guidance and forward guidance, there exists heterogeneity in the risk transmission of conventional monetary policy and QE across different financial markets. The latter increases systemic risk significantly within bond markets, foreign exchange markets and among financial intermediaries. This might be caused by increased search for yield behaviour as QE distinctively reduces longer term interest rates. Our analysis shows that there is a potential threat to financial stability caused by QE which should be concerned by monetary- and macroprudential policymakers.
OriginalspracheEnglisch
ErscheinungsortVienna
HerausgeberWU Vienna University of Economics and Business
Seitenumfang21
DOIs
PublikationsstatusVeröffentlicht - 1 März 2021

Publikationsreihe

ReiheDepartment of Economics Working Paper Series
Nummer312

WU Working Paper Reihe

  • Department of Economics Working Paper Series

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