Cyclical Risk Aversion, Precautionary Saving, and Monetary Policy

Bianca de Paoli and Pawel Zabczyk

Journal of Money, Credit and Banking, 2013, vol. 45, issue 1, 1-36

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—that is “lean against the wind”—following positive shocks. Under sufficiently persistent habits it is, in fact, optimal to increase interest rates following a rise in productivity.

Date: 2013
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https://doi.org/10.1111/j.1538-4616.2012.00560.x

Related works:
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 (2012)
Working Paper: Cyclical risk aversion, precautionary saving and monetary policy (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:wly:jmoncb:v:45:y:2013:i:1:p:1-36

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