Aggregate price shocks and financial instability: A historical analysis

By M. Bordo, Michael J. Dueker, David C. Wheelock. 2000

144 citations recorded by the source corpus.

This paper presents empirical evidence on the hypothesis that aggregate price disturbances cause or worsen financial instability. We construct two annual indexes of financial conditions for the United States covering 1790-1997, and estimate the effect of aggregate price shocks on each index using a dynamic ordered probit model. We find that price level shocks contributed to financial instability during 1790-1933, and that inflation rate shocks contributed to financial instability during 1980-97. Our research indicates that the size of the aggregate price shocks needed to substantially alter financial conditions depends on the institutional environment, but that a monetary policy focused on price stability would be conducive to financial stability.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/61fa5637eaccfaed04234ae60c8fc597ce2c0c5a

How researchers see this paper

The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.

In Economics and Econometrics

1. Blaise Gadanecz
2. Elke Hanschel
3. Pierre Monnin
4. Kaushik Jayaram

In Finance

1. Blaise Gadanecz
2. Elke Hanschel
3. Pierre Monnin
4. Kaushik Jayaram

Citations in the corpus

• Measuring and forecasting stress in the banking sector: evidence from Switzerland (2005, methodology): “This criterion is used by Bordo et al (2000), who consider the bank failure rate, and by Kaminsky and Reinhart (1996, 1999), who look at the closures, takeovers or mergers in the banking sector, to define crises.”
• Whither monetary and financial stability? the implications of evolving policy regimes (2004, unknown): “25 For an elaboration on this view, see Bordo (2000) and Bordo et al (2000).”
• The Financial Stress Index: Identification of Systemic Risk Conditions (2011, unknown): “In the first, systemic indexes, designed to predict economic conditions, develop as FSIs along the lines of the original Bordo, Dueker, and Wheelock (2000) research.”
• Asset Prices, Financial and Monetary Stability: Exploring the Nexus (2002, unknown): “Bordo et al (2000), for example, interpret the evidence as suggesting that the only contribution that monetary policy can make to financial stability is through avoiding unanticipated changes in prices, and that the cause of any anticipated price change is unimportant.26 Such a strong conclusion…”
• Measures of financial stability - a review (2009, background): “Bordo, Dueker and Wheelock (2000) construct a financial instability index with lags, incorporating bank failures, non-financial business bankruptcies, an ex post real interest rate and an interest rate quality spread.”
• Macroprudential Policy - A Literature Review (2012, unknown): “…the past decade, a growing literature has identified indicators of financial distress based on balance sheet indicators (Carson and Ingves, 2003; Bordo et al, 2000) – most notably the Financial Soundness indicators whose development was coordinated by the IMF (Moorhouse, 2004; IMF, 2008) – and…”