Monetary and Macroprudential Policy with Endogenous Risk

By Tobias Adrian, Fernando Duarte, Nellie Liang, Pawel Zabczyk

November 13, 2020

Preview Citation

Format: Chicago

Tobias Adrian, Fernando Duarte, Nellie Liang, and Pawel Zabczyk. Monetary and Macroprudential Policy with Endogenous Risk, (USA: International Monetary Fund, 2020) accessed December 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

We extend the New Keynesian (NK) model to include endogenous risk. Lower interest rates not only shift consumption intertemporally but also conditional output risk via their impact on risk-taking, giving rise to a vulnerability channel of monetary policy. The model fits the conditional output gap distribution and can account for medium-term increases in downside risks when financial conditions are loose. The policy prescriptions are very different from those in the standard NK model: monetary policy that focuses purely on inflation and output-gap stabilization can lead to instability. Macroprudential measures can mitigate the intertemporal risk-return tradeoff created by the vulnerability channel.

Subject: Economic sectors, Financial crises

Keywords: Macro-Finance., Macroprudential Policy, Monetary Policy

Publication Details

Pages:

55
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2020/236
Stock No:

WPIEA2020236
ISBN:

9781513561066
ISSN:

1018-5941

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