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Cyclical risk aversion, precautionary saving and monetary policy

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  • De Paoli, Bianca

    ()
    (Bank of England)

  • Zabczyk, Pawel

    ()
    (Bank of England)

Abstract

This paper analyses 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 following positive shocks.

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Bibliographic Info

Paper provided by Bank of England in its series Bank of England working papers with number 418.

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Length: 32 pages
Date of creation: 12 Apr 2011
Date of revision:
Handle: RePEc:boe:boeewp:0418

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Keywords: Precautionary saving; monetary policy; cyclical risk aversion; macro-finance; DSGE models.;

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References

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  1. Cochrane, John H. & Campbell, John, 1999. "By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," Scholarly Articles 3119444, Harvard University Department of Economics.
  2. Pierpaolo Benigno & Michael Woodford, 2005. "Inflation Stabilization And Welfare: The Case Of A Distorted Steady State," Journal of the European Economic Association, MIT Press, vol. 3(6), pages 1185-1236, December.
  3. Mark Kazarosian, 1993. "Precautionary Savings- A Panel Study," Boston College Working Papers in Economics 247, Boston College Department of Economics.
  4. Juan F. Rubio-Ramirez & Jesus Fernández-Villaverde, 2005. "Estimating dynamic equilibrium economies: linear versus nonlinear likelihood," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 20(7), pages 891-910.
  5. Peter Hördahl & Oreste Tristani & David Vestin, 2008. "The Yield Curve and Macroeconomic Dynamics," Economic Journal, Royal Economic Society, vol. 118(533), pages 1937-1970, November.
  6. Juillard, Michel & Karam, Philippe & Laxton, Douglas & Pesenti, Paolo, 2006. "Welfare-based monetary policy rules in an estimated DSGE model of the US economy," Working Paper Series 0613, European Central Bank.
  7. Glenn D. Rudebusch & Eric T. Swanson, 2008. "Examining the bond premium puzzle with a DSGE model," Working Paper Series 2007-25, Federal Reserve Bank of San Francisco.
  8. Martin Møller Andreasen, 2008. "Explaining Macroeconomic and Term Structure Dynamics Jointly in a Non-linear DSGE Model," CREATES Research Papers 2008-43, School of Economics and Management, University of Aarhus.
  9. Martin Floden, 2008. "Aggregate Savings When Individual Income Varies," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(1), pages 70-82, January.
  10. Sydney C. Ludvigson & Alexander Michaelides, 2001. "Does Buffer-Stock Saving Explain the Smoothness and Excess Sensitivity of Consumption?," American Economic Review, American Economic Association, vol. 91(3), pages 631-647, June.
  11. De Paoli, Bianca & Zabczyk, Pawel, 2009. "Why do risk premia vary over time? A theoretical investigation under habit formation," Bank of England working papers 361, Bank of England.
  12. Huggett, Mark & Ospina, Sandra, 2001. "Aggregate precautionary savings: when is the third derivative irrelevant?," Journal of Monetary Economics, Elsevier, vol. 48(2), pages 373-396, October.
  13. Ravenna , Federico & Seppälä , Juha, 2006. "Monetary policy and rejections of the expectations hypothesis," Research Discussion Papers 25/2006, Bank of Finland.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Risk Aversion and the Natural Interest Rate
    by Blog Author in Liberty Street Economics on 2014-07-16 11:00:00
  2. 'Risk Aversion and the Natural Interest Rate'
    by Mark Thoma in Economist's View on 2014-07-16 08:21:30
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Cited by:
  1. Michael Hatcher, 2013. "The inflation risk premium on government debt in an overlapping generations model," Working Papers 2013_17, Business School - Economics, University of Glasgow.
  2. Hatcher, Michael, 2011. "Time-varying volatility, precautionary saving and monetary policy," Bank of England working papers 440, Bank of England.
  3. Andersson, Magnus & D’Agostino, Antonello & de Bondt, Gabe & Roma, Moreno, 2011. "The predictive content of sectoral stock prices: a US-euro area comparison," Working Paper Series 1343, European Central Bank.

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