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Monetary and Macroprudential Policy with Endogenous Risk
Author: Mr. Tobias Adrianhttps://orcid.org/0000-0001-9379-9592, Fernando Duarte, Nellie Liang, and Pawel Zabczyk
Series:
IMF Working Papers
Volume/Issue:
Volume 2020: Issue 236
Language:
English
Publication Date:
13 Nov 2020
DOI:
https://doi.org/10.5089/9781513561066.001
ISBN:
9781513561066
ISSN:
1018-5941
Pages:
55
Keywords:
Monetary Policy; Macroprudential Policy; Macro-Finance.
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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.
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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.
Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund