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Monetary and Finacial Policy with Privately Optimal Risk Taking

Author

Listed:
  • Alfred Duncan
  • Joao Pedro De Camargo Mainente
  • Charles Nolan

Abstract

We present a model with macroprudential externalities emerging from market allocation of aggregate risks. The model predicts a paradox of safety: an increase in household risk aversion increases the volatility of output and consumption. Optimal monetary and macroprudential policies are designed to stabilise the economy whilst not exacerbating moral hazard in future periods. There is typically a macroprudential role for monetary policy, sometimes a dominant role, even when macroprudential policies are set optimally. But there are limits too. A monetary policy that focuses overly on financial stability loses control of inflation.

Suggested Citation

  • Alfred Duncan & Joao Pedro De Camargo Mainente & Charles Nolan, 2024. "Monetary and Finacial Policy with Privately Optimal Risk Taking," Working Papers 2024_12, Business School - Economics, University of Glasgow.
    • Handle: RePEc:gla:glaewp:2024_12
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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