Cyclical Risk Aversion, Precautionary Saving and Monetary Policy
AbstractThis paper analyzes 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 - i.e. `lean against the wind' - following positive shocks. Since the size of these `risk-adjustments' is increasing in the degree of macroeconomic volatility, ignoring this channel could lead to larger policy errors in turbulent times - with good luck translating into good policy.
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Bibliographic InfoPaper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp1132.
Date of creation: Mar 2012
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precautionary saving; monetary policy; cyclical risk aversion; macro-finance; non-linearities;
Other versions of this item:
- Bianca De Paoli & Pawel Zabczyk, 2013. "Cyclical Risk Aversion, Precautionary Saving, and Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(1), pages 1-36, 02.
- De Paoli, Bianca & Zabczyk, Pawel, 2011. "Cyclical risk aversion, precautionary saving and monetary policy," Bank of England working papers 418, Bank of England.
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-03-14 (All new papers)
- NEP-MAC-2012-03-14 (Macroeconomics)
- NEP-MON-2012-03-14 (Monetary Economics)
- NEP-UPT-2012-03-14 (Utility Models & Prospect Theory)
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Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:
- Risk Aversion and the Natural Interest Rate
by Blog Author in Liberty Street Economics on 2014-07-16 11:00:00
- '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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