How to Manage Macroeconomic and Financial Stability Risks: A New Framework

Thibaut Duprey and Alexander Ueberfeldt

No 2018-11, Staff Analytical Notes from Bank of Canada

Abstract: Monetary policy decisions need to consider all potential outcomes, not just the most likely path for the economy. This is especially true in the presence of elevated financial system vulnerabilities, which lead to increased downside risks for future growth. In a novel risk-management framework, we decompose the outlook for the distribution of future gross domestic product (GDP) growth into macroeconomic and financial stability risks. When analyzing the efficacy of policy tools, we find that macroprudential tightening is substantially more effective than monetary policy at reducing downside risks to future GDP growth.

Keywords: Central bank research; Economic models; Financial stability; Financial system regulation and policies; Interest rates; Monetary Policy; Monetary policy framework (search for similar items in EconPapers)
JEL-codes: E44 E52 E58 G01 (search for similar items in EconPapers)
Pages: 9 pages
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

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