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Monetary policy and financial conditions: a cross-country study

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Listed:
  • Tobias Adrian
  • Fernando M. Duarte
  • Federico Grinberg
  • Tommaso Mancini-Griffoli

Abstract

Loose financial conditions forecast high output growth and low output volatility up to six quarters into the future, generating time-varying downside risk to the output gap, which we measure by GDP-at-Risk (GaR). This finding is robust across countries, conditioning variables, and time periods. We study the implications for monetary policy in a reduced-form New Keynesian model with financial intermediaries that are subject to a Value at Risk (VaR) constraint. Optimal monetary policy depends on the magnitude of downside risk to GDP, as it impacts the consumption-savings decision via the Euler constraint, and financial conditions via the tightness of the VaR constraint. The optimal monetary policy rule exhibits a pronounced response to shifts in financial conditions for most countries in our sample. Welfare gains from taking financial conditions into account are shown to be sizable.

Suggested Citation

  • Tobias Adrian & Fernando M. Duarte & Federico Grinberg & Tommaso Mancini-Griffoli, 2019. "Monetary policy and financial conditions: a cross-country study," Staff Reports 890, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednsr:890
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    References listed on IDEAS

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    Cited by:

    1. Trent Saunders & Peter Tulip, 2019. "Cost-benefit Analysis of Leaning against the Wind," RBA Research Discussion Papers rdp2019-05, Reserve Bank of Australia.
    2. C. Bora Durdu & Alex Martin & Ilknur Zer, 2020. "The Role of US Monetary Policy in Banking Crises Across the World," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 68(1), pages 66-107, March.
    3. Eric Monnet & Miklos Vari, 2019. "Liquidity Ratios as Monetary Policy Tools: Some Historical Lessons for Macroprudential Policy," IMF Working Papers 19/176, International Monetary Fund.
    4. Christian Pfister & Jean-Guillaume Sahuc, 2020. "Unconventional monetary policies: A stock-taking exercise," Revue d'économie politique, Dalloz, vol. 130(2), pages 137-169.
    5. Ceyhun Bora Durdu & Alex Martin & Ilknur Zer, 2019. "The Role of U.S. Monetary Policy in Global Banking Crises," Finance and Economics Discussion Series 2019-039, Board of Governors of the Federal Reserve System (U.S.).
    6. Agur, Itai, 2019. "Monetary and macroprudential policy coordination among multiple equilibria," Journal of International Money and Finance, Elsevier, vol. 96(C), pages 192-209.
    7. Adrian, Tobias & Grinberg, Federico & Liang, Nellie & Malik, Sheherya, 2018. "The Term Structure of Growth-at-Risk," CEPR Discussion Papers 13349, C.E.P.R. Discussion Papers.
    8. Agur, Itai & Demertzis, Maria, 2019. "Will macroprudential policy counteract monetary policy’s effects on financial stability?," The North American Journal of Economics and Finance, Elsevier, vol. 48(C), pages 65-75.
    9. Zoe Venter, 2019. "The Interaction Between ConventionalMonetary Policy and Financial Stability: Chile, Colombia, Japan, Portugal and the UK," Working Papers REM 2019/96, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    10. Robin Greenwood & Samuel G. Hanson & Andrei Shleifer & Jakob Ahm Sørensen, 2020. "Predictable Financial Crises," NBER Working Papers 27396, National Bureau of Economic Research, Inc.
    11. Hristov, Nikolay & Hülsewig, Oliver & Scharler, Johann, 2020. "Unconventional monetary policy shocks in the euro area and the sovereign-bank nexus," Discussion Papers 19/2020, Deutsche Bundesbank.
    12. Bihari, Péter, 2019. "Szempontok a jegybank mandátumának újragondolásához [Perspectives for a review of the central bank mandate]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(12), pages 1241-1256.
    13. Rania A. Al-Mashat & Ales Bulir & N. Nergiz Dinçer & Tibor Hlédik & Tomás Holub & Asya Kostanyan & Douglas Laxton & Armen Nurbekyan & Rafael A Portillo & Hou Wang, 2018. "An Index for Transparency for Inflation-Targeting Central Banks: Application to the Czech National Bank," IMF Working Papers 18/210, International Monetary Fund.
    14. Eriksen, Jonas N., 2019. "Cross-sectional return dispersion and currency momentum," Journal of Empirical Finance, Elsevier, vol. 53(C), pages 91-108.
    15. Pierre-Richard Agénor & Luiz Awazu Pereira da Silva, 2018. "Financial spillovers, spillbacks, and the scope for international macroprudential policy coordination," BIS Papers, Bank for International Settlements, number 97, April.
    16. Warapong Wongwachara & Bovonvich Jindarak & Nuwat Nookhwun & Sophon Tunyavetchakit & Chutipha Klungjaturavet, 2018. "Integrating Monetary Policy and Financial Stability: A New Framework," PIER Discussion Papers 100, Puey Ungphakorn Institute for Economic Research, revised Dec 2018.

    More about this item

    Keywords

    financial stability; financial conditions; monetary policy;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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