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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp1132.
Date of creation: Mar 2012
Date of revision:
Contact details of provider:
Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP
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)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Ravenna , Federico & Seppälä , Juha, 2006. "Monetary policy and rejections of the expectations hypothesis," Research Discussion Papers 25/2006, Bank of Finland.
- Cochrane, John H. & Campbell, John, 1999.
"By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior,"
3119444, Harvard University Department of Economics.
- John Y. Campbell & John H. Cochrane, 1995. "By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," NBER Working Papers 4995, National Bureau of Economic Research, Inc.
- John Y. Campbell & John H. Cochrane, 1994. "By force of habit: a consumption-based explanation of aggregate stock market behavior," Working Papers 94-17, Federal Reserve Bank of Philadelphia.
- John Y. Campbell & John H. Cochrane, 1994. "By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," CRSP working papers 412, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
- 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.
- Pierpaolo Benigno & Michael Woodford, 2004. "Inflation stabilization and welfare: The case of a distorted steady state," Discussion Papers 0405-04, Columbia University, Department of Economics.
- Michael Woodford & Pierpaolo Benigno, 2004. "Inflation Stabilization and Welfare: The Case of a Distorted Steady State," 2004 Meeting Papers 481, Society for Economic Dynamics.
- Pierpaolo Benigno & Michael Woodford, 2004. "Inflation Stabilization and Welfare: The Case of a Distorted Steady State," NBER Working Papers 10838, National Bureau of Economic Research, Inc.
- 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.
- Rudebusch, Glenn D. & Swanson, Eric T., 2008. "Examining the bond premium puzzle with a DSGE model," Journal of Monetary Economics, Elsevier, vol. 55(Supplemen), pages S111-S126, October.
- 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.
- 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.
- Jesús Fernández-Villaverde & Juan Francisco Rubio-Ramírez, 2004. "Estimating dynamic equilibrium economies: linear versus nonlinear likelihood," Working Paper 2004-3, Federal Reserve Bank of Atlanta.
- Jesus Fernandez-Villaverde & Juan F. Rubio-Ramirez, 2004. "Estimating Dynamic Equilibrium Economies: Linear versus Nonlinear Likelihood," PIER Working Paper Archive 04-005, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
- Hördahl, Peter & Tristani, Oreste & Vestin, David, 2007.
"The yield curve and macroeconomic dynamics,"
Working Paper Series
0832, European Central Bank.
- 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.
- 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.
- De Paoli, Bianca & Zabczyk, Pawel, 2012. "Why Do Risk Premia Vary Over Time? A Theoretical Investigation Under Habit Formation," Macroeconomic Dynamics, Cambridge University Press, vol. 16(S2), pages 252-266, September.
- Floden, Martin, 2005.
"Aggregate Savings When Individual Income Varies,"
Working Paper Series in Economics and Finance
591, Stockholm School of Economics.
- Mark Kazarosian, 1993.
"Precautionary Savings- A Panel Study,"
Boston College Working Papers in Economics
247, Boston College Department of Economics.
- 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.
- 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.
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
- Hatcher, Michael, 2011. "Time-varying volatility, precautionary saving and monetary policy," Bank of England working papers 440, Bank of England.
- 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.
- Hatcher, Michael, 2013.
"The Inflation Risk Premium on Government Debt in an Overlapping Generations Model,"
SIRE Discussion Papers
2013-81, Scottish Institute for Research in Economics (SIRE).
- 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.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.