The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.
Stefan Laseen, Andrea Pescatori, and Jarkko Turunen
INTERNATIONAL MONETARY FUND
We introduce time-varying systemic risk in an otherwise standard New-Keynesian
model to study whether a simple leaning-against-the-wind policy can reduce systemic risk
and improve welfare. We find that an unexpected increase in policy rates reduces output,
inflation, and asset prices without fundamentally mitigating financial risks. We also find that
while a systematic monetary policy reaction can improve welfare, it is too simplistic: (1) it is
highly sensitive to parameters of the model and (2) is detrimental in the presence of falling
asset prices. Macroprudential policy, similar to a countercyclical capital requirement, is more
robust and leads to higher welfare gains.