Assessing the link between Price and Financial Stability

Christophe Blot (1) , Jérôme Creel (1) , Paul Hubert (1) , Fabien Labondance (2) , Francesco Saraceno (1)

1 OFCE - Observatoire français des conjonctures économiques (Sciences Po)
2 ARPEGE - Atelier de recherche sur la politique économique et la gestion des entreprises

This paper aims at investigating first the (possibly time-varying) empirical relationship between the level and conditional variances of price and financial stability, and second, the effects of macro and policy variables on this relationship in the United States and the Eurozone. Three empirical methods are used to examine the relevance of A.J. Schwartz's "conventional wisdom" that price stability would yield financial stability. Using simple correlations, VAR and Dynamic Conditional Correlations, we reject the hypothesis that price stability is positively correlated to financial stability. We then discuss the empirical appropriateness of the "leaning against the wind" monetary policy approach.

Keywords: Price stability; Financial stability; DCC-GARCH; VAR

Domains: Economics and Finance

Christophe Blot, Jérôme Creel, Paul Hubert, Fabien Labondance, Francesco Saraceno. Assessing the link between Price and Financial Stability. 2014. ⟨hal-01070529⟩