Monetary and Macroprudential Policy with Endogenous Risk

Tobias Adrian, Fernando Duarte, Nellie Liang and Pawel Zabczyk

No 2020/236, IMF Working Papers from International Monetary Fund

Abstract: 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.

Keywords: Monetary Policy; Macroprudential Policy; Macro-Finance. (search for similar items in EconPapers)
Pages: 55
Date: 2020-11-13
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
References: Add references at CitEc
Citations: View citations in EconPapers (17)

Downloads: (external link)
http://www.imf.org/external/pubs/cat/longres.aspx?sk=49885 (application/pdf)

Related works:
Working Paper: Monetary and Macroprudential Policy with Endogenous Risk (2020)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:imf:imfwpa:2020/236

Ordering information: This working paper can be ordered from
http://www.imf.org/external/pubs/pubs/ord_info.htm

Access Statistics for this paper

More papers in IMF Working Papers from International Monetary Fund International Monetary Fund, Washington, DC USA. Contact information at EDIRC.
Bibliographic data for series maintained by Akshay Modi ().