Scandinavian Working Papers in Economics

Working Paper Series,
Sveriges Riksbank (Central Bank of Sweden)

No 137: Financial Instability and Monetary Policy: The Swedish Evidence

U. Michael Bergman () and Jan Hansen ()
Additional contact information
U. Michael Bergman: Department of Economics, Lund University, Postal: P.O. Box 7082, SE–22007 Lund, Sweden
Jan Hansen: Research Department, Central Bank of Sweden, Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden

Abstract: This paper examines the relationship between financial instability and monetary policy within the Swedish economy. Based on a standard VAR model of monetary policy extended to include measures of financial instability and credit expansions, we examine the interaction between monetary policy and financial stability. We find that both higher interest rates, higher prices and lending expansions contribute to financial instability. As the effects from price shocks are strong and persistent compared to other shocks, our conclusion is that we cannot reject that price stability and financial stability are mutually consistent goals for monetary policy.

Keywords: Financial instability; monetary policy; VAR model; structural shocks

JEL-codes: C12; C22

41 pages, June 1, 2002

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