Monetary and Macroprudential Policy with Endogenous Risk

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Author/Editor: Tobias Adrian, Fernando Duarte, Nellie Liang, Pawel Zabczyk
Release Date: © November, 2020
ISBN : 978-1-51356-240-7
Stock #: WPIET2020236
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Description

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.




More publications in this series: Working Papers


More publications by: Tobias Adrian ; Fernando Duarte ; Nellie Liang ; Pawel Zabczyk