Financial stability and the Fed: Evidence from congressional hearings

Abstract

AbstractThis article retraces how financial stability considerations interacted with US monetary policy before and during the Great Recession. Using text‐mining techniques, this article innovates by constructing indicators for financial stability sentiment expressed during testimonies of five Federal Reserve Chairs. Including these text‐based measures adds explanatory power to Taylor‐rule models. Negative financial stability sentiment coincided with a more accommodative monetary policy stance than implied by standard Taylor‐rule factors, even during the decades before the Great Recession. These findings are consistent with a preference for monetary policy reacting to financial instability rather than acting pre‐emptively to a perceived build‐up of risks.