Monetary policy and financial conditions: a cross-country study

Tobias Adrian, Fernando Duarte, Federico Grinberg and Tommaso Mancini-Griffoli

No 890, Staff Reports from Federal Reserve Bank of New York

Abstract: Loose financial conditions forecast high output growth and low output volatility up to six quarters into the future, generating time-varying downside risk to the output gap, which we measure by GDP-at-Risk (GaR). This finding is robust across countries, conditioning variables, and time periods. We study the implications for monetary policy in a reduced-form New Keynesian model with financial intermediaries that are subject to a Value at Risk (VaR) constraint. Optimal monetary policy depends on the magnitude of downside risk to GDP, as it impacts the consumption-savings decision via the Euler constraint, and financial conditions via the tightness of the VaR constraint. The optimal monetary policy rule exhibits a pronounced response to shifts in financial conditions for most countries in our sample. Welfare gains from taking financial conditions into account are shown to be sizable.

Keywords: financial stability; financial conditions; monetary policy (search for similar items in EconPapers)
JEL-codes: E52 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2019-06-01
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (5)

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Working Paper: Monetary Policy and Financial Conditions: A Cross-Country Study (2018)
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