The School of Economics invites you to a HDR seminar presented by Tristan Truuvert (University of Sydney).

Do low interest rates make financial crises more likely?

Co-authors: 

Christopher Gibbs (University of Sydney)

Abstract 

There is currently widespread debate over whether low interest rate policies directly lead to financial instability. Deviations of policy rates from those prescribed by Taylor-type rules are argued to contribute to excess credit growth leading to financial instability.

We re-examine recent empirical evidence from long time series of cross-country macroeconomic data to directly test if systematic deviations from Taylor-type rules predicts either credit growth or financial crises. We find no systematic evidence that the stance of monetary policy in relation to a Taylor rule has any predictive power. The empirical evidence for a link from low interest rate to financial instability instead is best explained by exogenous shocks to credit supply, which are unrelated to monetary policy. Exogenous shocks to credit supply can significantly raise credit growth and house prices. Monetary policy shocks on the other hand tend to have the opposite effect dampening credit growth and house prices.