NKV: A New Keynesian Model with Vulnerability

Tobias Adrian, Fernando Duarte, Nellie Liang and Pawel Zabczyk

AEA Papers and Proceedings, 2020, vol. 110, 470-76

Abstract: We present a New Keynesian model with endogenous risk. The conditional output gap volatility depends on the price of risk, giving rise to a vulnerability channel of monetary policy. Lower interest rates not only shift consumption intertemporally but also shift conditional output risk. The model fits estimates of the conditional output gap distribution 1 to 12 quarters ahead and suggests an intertemporal risk return trade-off for policymakers. Via the impact on risk taking, easy monetary policy lowers short-term downside risks to growth but increases medium-term risks. The framework can be used to jointly consider macroprudential and monetary policy.

JEL-codes: E12 E23 E43 E52 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (3)

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DOI: 10.1257/pandp.20201023

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