An Historical Perspective on the Quest for Financial Stability and the Monetary Policy Regime

Abstract

The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

Bank capital: Excess credit and crisis incidence

“…The causes of banking crises remain disputed with Borio (2014) and Taylor (2011, 2013) and Jordà et al (2018) strongly supporting the view that excess credit growth is a major factor in driving banking crises. Bordo (2018) disputes this and suggests that only the 1929-1933 crisis and the 2007-8 crises showing links to credit growth, and this view is also advanced by Kiley (2018) who shows that credit has contributed little to the explanation of the crises Jordà, Schularick and Taylor examine, even if it is statistically significant. We study only the post Bretton Woods era in similar countries, and we draw the conclusion that credit (no longer) matters (much) in driving financial crises.…”

“…For the sake of brevity, we do not discuss the consequences of crises, but rather focus on their causes and policy responses to them. The literature on the causes of crises is summarised in Bordo and Meissner (2016) and they bring out several strands, ranging from narrative accounts such as in and Reinhart and Rogoff (2009) and Bordo (2018) through simple univariate early warning indicators used by Kaminsky and Reinhart (1999) and by the Bank for International Settlements in a sequence of staff papers by Borio and Drehmann (2009) and others in subsequent papers, to more sophisticated logit based models as in Barrell et al (2010) and Schularick and Taylor (2012). These approaches are compared in Davis and Karim (2008) and they come down firmly in favour of the last method.…”

“…In the next section of the paper we review the related literature on the factors driving crises over the last 130 years, and we re-emphasise the conclusion of Bordo (2018) that there is little evidence to support the importance of credit growth over this period. House price bubbles have been commonly linked to crises as well, and we look at these in the third section, building on a sequence of papers by Karim (eg Barrell et al 2010, Karim et al 2013).…”

Banking Concentration and Financial Crises

“…There has been an extensive technical and historical literature on the causes and consequences of crises, and it has expanded rapidly since 2007. Bordo and Meissner (2016) bring out several strands, from narrative accounts such as Reinhart and Rogoff (2009) and Bordo (2018) through simple univariate early warning indicators used by Kaminsky and Reinhart (1999) and Borio and Drehmann (2009), to more sophisticated logit based models as in Barrell et al (2010) and Schularick and Taylor (2012). However, this macroeconomic literature has taken little notice of the indicators of banking market structure and the implications of these for crisis incidence, even though stress levels are clearly affected by market structure.…”

How does monetary policy respond to the dynamics of the shadow banking sector?

“…However, the World Wars I and II and the (previous suspension and subsequent) downfall of the gold standard paved the way for the implementation of countercyclical fiscal and monetary policies. In this context, central banks were established to provide fiscal support to states emerging from military conflicts, and inflation and growth became key indicators for the evaluation of government performance (Bordo, ). Not surprisingly, the post‐war period was characterized by a significant amount of effort devoted to emphasizing the importance of central bank independence, modelling the linkages between monetary policy and real economic activity as well as understanding the optimal policy response to fluctuations in the output gap and the inflation rate and the advantages of an inflation‐targeting framework (White, ).…”