Ester Faiaa and Sören Karaub
The risk-taking channel of monetary policy acquires relevance for macro policymakers only if it affects systemic risk. We find robust evidence that a monetary tightening lowers systemic risk using cross-country and time-series data in a VAR framework for 29 G-SIBs from seven countries, different risk metrics (ΔCoVaR, LRMES), as well as econometric specifications and identification schemes (panel VAR with recursive identification; proxy VARs using external instruments). We then assess implications for policy. First, we find that both U.S. and euro-area monetary policy shocks spill into other countries' systemic risk. Second, we document that macroprudential policy plays a significant role in taming the unintended consequences of monetary policy on systemic risk, particularly so for U.S. policy spillovers.
JEL Code: E44, E52, G18, G21.
Full article (PDF, 40 pages)
Online appendix (PDF, 28 pages)
a Goethe University Frankfurt and CEPR
b Deutsche Bundesbank