Monetary policy and systemic risk : U.S. evidence

We assess whether monetary policymakers follow systemic risk in adjusting monetary policy for the US. over a period spanning from 1960 to 2011. We evaluate the reactions of monetary policy variables during the corresponding periods of high and low systemic risk. We estimate a threshold Vector Autoregressive (VAR) model and provide evidence that U.S. monetary policy is affected by systemic risk measured by CATFIN proposed by Allen et al. (Review of Financial Studies 25(10): 3000–3036, 2012). This effect is asymmetric between periods of high systemic risk and periods of low systemic risk. The threshold value of CATFIN is in the area of 0.048–0.054. Our results support the monitoring of CATFIN by the monetary authorities, as an effective proxy of financial fragility to be included in the monetary policy strategy.