Monetary and Macroprudential Policy with Endogenous Risk

Monetary and Macroprudential Policy with Endogenous Risk
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Volume/Issue: Volume 2020 Issue 236
Publication date: November 2020
ISBN: 9781513561066
$18.00
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Topics covered in this book

This title contains information about the following subjects. Click on a subject if you would like to see other titles with the same subjects.

Economics- Macroeconomics , International - Economics , Monetary Policy , Macroprudential Policy , Macro-Finance

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.