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The risk management approach to macro-prudential policy

Author

Listed:
  • Chavleishvili, Sulkhan
  • Engle, Robert F.
  • Fahr, Stephan
  • Kremer, Manfred
  • Manganelli, Simone
  • Schwaab, Bernd

Abstract

Macro-prudential authorities need to assess medium-term downside risks to the real economy, caused by severe financial shocks. Before activating policy measures, they also need to consider their short-term negative impact. This gives rise to a risk management problem, an inter-temporal trade-off between expected growth and downside risk. Predictive distributions are estimated with structural quantile vector autoregressive models that relate economic growth to measures of financial stress and the financial cycle. An empirical study with euro area and U.S. data shows how to construct indicators of macro-prudential policy stance and to assess when interventions may be beneficial. JEL Classification: G21, C33

Suggested Citation

  • Chavleishvili, Sulkhan & Engle, Robert F. & Fahr, Stephan & Kremer, Manfred & Manganelli, Simone & Schwaab, Bernd, 2021. "The risk management approach to macro-prudential policy," Working Paper Series 2565, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20212565
    Note: 373346
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    References listed on IDEAS

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    Cited by:

    1. Tihana Skrinjaric & Maja Sabol, 2024. "Easier Said than Done: Predicting Downside Risks to House Prices in Croatia," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 74(1), pages 43-72, March.
    2. Chavleishvili, Sulkhan & Kremer, Manfred & Lund-Thomsen, Frederik, 2023. "Quantifying financial stability trade-offs for monetary policy: a quantile VAR approach," Working Paper Series 2833, European Central Bank.
    3. Kirstin Hubrich & Daniel F. Waggoner, 2022. "The transmission of financial shocks and leverage of financial institutions: An endogenous regime switching framework," Finance and Economics Discussion Series 2022-034, Board of Governors of the Federal Reserve System (U.S.).
    4. Bochmann, Paul & Dieckelmann, Daniel & Fahr, Stephan & Ruzicka, Josef, 2023. "Financial stability considerations in the conduct of monetary policy," Working Paper Series 2870, European Central Bank.
    5. Tihana Skrinjaric & Maja Sabol, 2024. "Easier Said than Done: Predicting Downside Risks to House Prices in Croatia," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 74(1), pages 43-72, March.
    6. repec:ecb:ecbdps:202113 is not listed on IDEAS
    7. Tihana Škrinjarić, 2023. "Macroprudential stance assessment: problems of measurement, literature review and some comments for the case of Croatia," Working Papers 72, The Croatian National Bank, Croatia.
    8. Shuffield Seyram Asafo & Michal Moszynski, 2022. "The combined effects of monetary and macroprudential policies," SN Business & Economics, Springer, vol. 2(9), pages 1-20, September.
    9. Kremer, Manfred & Chavleishvili, Sulkhan, 2021. "Measuring Systemic Financial Stress and its Impact on the Macroeconomy," VfS Annual Conference 2021 (Virtual Conference): Climate Economics 242346, Verein für Socialpolitik / German Economic Association.
    10. Chavleishvili, Sulkhan & Fahr, Stephan & Kremer, Manfred & Manganelli, Simone & Schwaab, Bernd, 2021. "A novel risk management perspective for macroprudential policy," Research Bulletin, European Central Bank, vol. 87.
    11. Sulkhan Chavleishvili & Simone Manganelli, 2024. "Forecasting and stress testing with quantile vector autoregression," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 39(1), pages 66-85, January.
    12. Chavleishvili, Sulkhan & Kremer, Manfred, 2023. "Measuring systemic financial stress and its risks for growth," Working Paper Series 2842, European Central Bank.

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    More about this item

    Keywords

    financial conditions; growth-at-risk; macro-prudential policy; quantile vector autoregression; stress testing;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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