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Monetary Policy and Financial Stability: The Role of Inflation Targeting
Author(s) -
Sethi Dinabandhu,
Acharya Debashis
Publication year - 2020
Publication title -
australian economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.308
H-Index - 29
eISSN - 1467-8462
pISSN - 0004-9018
DOI - 10.1111/1467-8462.12348
Subject(s) - economics , inflation (cosmology) , vector autoregression , financial stability , monetary policy , index (typography) , financial market , monetary economics , economic stability , panel data , stability (learning theory) , macroeconomics , finance , financial system , econometrics , physics , theoretical physics , world wide web , computer science , machine learning
This article examines the relationship between Inflation targeting (IT) and financial instability from 1990 to 2015 for Asian economies. To measure financial instability, a multidimensional financial conditioning index is calculated following the ECB's approach. Using a fixed effects panel data model the study finds that adoption of IT policy in Asian economies has an adverse impact on financial stability, thus rejecting the ‘conventional wisdom’ hypothesis. Further, the Vector Autoregression (VAR) result shows that an IT regime increases housing returns and encourages investors to take higher risks.