Monetary and Finacial Policy with Privately Optimal Risk Taking

Alfred Duncan, Joao Pedro De Camargo Mainente and Charles Nolan

Working Papers from Business School - Economics, University of Glasgow

Abstract: We present a model with macroprudential externalities emerging from market allocation of aggregate risks. The model predicts a paradox of safety: an increase in household risk aversion increases the volatility of output and consumption. Optimal monetary and macroprudential policies are designed to stabilise the economy whilst not exacerbating moral hazard in future periods. There is typically a macroprudential role for monetary policy, sometimes a dominant role, even when macroprudential policies are set optimally. But there are limits too. A monetary policy that focuses overly on financial stability loses control of inflation.

Keywords: Macroeconomics; Incomplete Markets; Monetary Policy. (search for similar items in EconPapers)
JEL-codes: D52 E32 E52 (search for similar items in EconPapers)
Date: 2024-09
New Economics Papers: this item is included in nep-ban, nep-cba and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:gla:glaewp:2024_12

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