Cyclical risk aversion, precautionary saving and Monetary Policy

Bianca De Paoli and Pawel Zabczyk

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: This paper analyzes the conduct of monetary policy in an environment in which cyclical swings in risk appetite affect households' propensity to save. It uses a New-Keynesian model featuring external habit formation to show that taking note of precautionary saving motives justifies an accommodative policy bias in the face of persistent, adverse disturbances. Equally, policy should be more restrictive - i.e. `lean against the wind' - following positive shocks. Since the size of these `risk-adjustments' is increasing in the degree of macroeconomic volatility, ignoring this channel could lead to larger policy errors in turbulent times - with good luck translating into good policy.

Keywords: precautionary saving; monetary policy; cyclical risk aversion; macro-finance; non-linearities (search for similar items in EconPapers)
JEL-codes: E32 G12 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2012-03-02
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http://eprints.lse.ac.uk/121767/ Open access version. (application/pdf)

Related works:
Journal Article: Cyclical Risk Aversion, Precautionary Saving, and Monetary Policy (2013)
Journal Article: Cyclical Risk Aversion, Precautionary Saving, and Monetary Policy (2013)
Working Paper: Cyclical Risk Aversion, Precautionary Saving and Monetary Policy (2012)
Working Paper: Cyclical risk aversion, precautionary saving and monetary policy (2011)
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