Systemic Risk: A New Trade-off for Monetary Policy?

Stefan Laséen (), Andrea Pescatori and Jarkko Turunen

No 2015/142, IMF Working Papers from International Monetary Fund

Abstract: We introduce time-varying systemic risk in an otherwise standard New-Keynesian model to study whether a simple leaning-against-the-wind policy can reduce systemic risk and improve welfare. We find that an unexpected increase in policy rates reduces output, inflation, and asset prices without fundamentally mitigating financial risks. We also find that while a systematic monetary policy reaction can improve welfare, it is too simplistic: (1) it is highly sensitive to parameters of the model and (2) is detrimental in the presence of falling asset prices. Macroprudential policy, similar to a countercyclical capital requirement, is more robust and leads to higher welfare gains.

Keywords: WP; monetary policy; Endogenous Financial Risk; DSGE models; Non-Linear Dynamics; Policy Evaluation; monetary policy reaction; surprise monetary policy tightening; inflation index; prices-low return; monetary policy surprise; equity constraint; monetary policy shock; deviations from fundamentals; utility function; price inflation index; monetary policy behavior; equity constraint bind; Financial sector; Asset prices; Stocks; Nonbank financial institutions; Inflation; Global (search for similar items in EconPapers)
Pages: 46
Date: 2015-06-30
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Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Systemic risk: A new trade-off for monetary policy? (2017)
Working Paper: Systemic Risk: A New Trade-Off for Monetary Policy? (2017)
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