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Monetary policy and financial conditions: a cross-country study

Author

Listed:
  • Adrian, Tobias

    (International Monetary Fund)

  • Duarte, Fernando M.

    (Federal Reserve Bank of New York)

  • Grinberg, Federico

    (International Monetary Fund)

  • Mancini-Griffoli, Tommaso

    (International Monetary Fund)

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

  • Adrian, Tobias & Duarte, Fernando M. & Grinberg, Federico & Mancini-Griffoli, Tommaso, 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. 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 (US).
    3. 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.
    4. 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.
    5. repec:bis:bisbps:97 is not listed on IDEAS
    6. 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

    monetary policy; financial conditions; financial stability;

    JEL classification:

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

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