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Systemic Risk: A New Trade-off for Monetary Policy?

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  • Mr. Andrea Pescatori
  • Mr. Jarkko Turunen
  • Stefan Laseen

Abstract

We introduce time-varying systemic risk in an otherwise standard New-Keynesian model to study whether a simple leaning-against-the-wind policy can reduce systemic risk and improve welfare. We find that an unexpected increase in policy rates reduces output, inflation, and asset prices without fundamentally mitigating financial risks. We also find that while a systematic monetary policy reaction can improve welfare, it is too simplistic: (1) it is highly sensitive to parameters of the model and (2) is detrimental in the presence of falling asset prices. Macroprudential policy, similar to a countercyclical capital requirement, is more robust and leads to higher welfare gains.

Suggested Citation

  • Mr. Andrea Pescatori & Mr. Jarkko Turunen & Stefan Laseen, 2015. "Systemic Risk: A New Trade-off for Monetary Policy?," IMF Working Papers 2015/142, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:2015/142
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Systemic Risk: A New Trade-Off for Monetary Policy?
      by Christian Zimmermann in NEP-DGE blog on 2017-10-10 02:40:54

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    Cited by:

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    2. Levieuge, G. & Lucotte, Y. & Pradines-Jobet, F., 2019. "Central banks’ preferences and banking sector vulnerability," Journal of Financial Stability, Elsevier, vol. 40(C), pages 110-131.
    3. Xia Chen & Chun-Ping Chang, 2021. "The shocks of natural hazards on financial systems," Natural Hazards: Journal of the International Society for the Prevention and Mitigation of Natural Hazards, Springer;International Society for the Prevention and Mitigation of Natural Hazards, vol. 105(3), pages 2327-2359, February.
    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. Chokri Zehri, 2020. "The Domestic Impacts And Spillovers Of Capital Controls," Economic Annals, Faculty of Economics, University of Belgrade, vol. 65(227), pages 31-66, October –.
    6. Zhang, Ailian & Pan, Mengmeng & Liu, Bai & Weng, Yin-Che, 2020. "Systemic risk: The coordination of macroprudential and monetary policies in China," Economic Modelling, Elsevier, vol. 93(C), pages 415-429.
    7. Eduardo C. Castro, 2020. "RegGae: a toolkit for macroprudential policy with DSGEs," Working Papers Series 526, Central Bank of Brazil, Research Department.
    8. Mr. Kenji Moriyama & Mr. Nathan Porter & Ms. Celine Rochon & Ran Bi & Jeta Menkulasi & Mr. Jiaqian Chen & Mr. Camilo E Tovar Mora & Ms. Aleksandra Zdzienicka & Ms. Ghada Fayad & Mr. Itai Agur & Mr. Zh, 2020. "Managing External Volatility: Policy Frameworks in Non-Reserve Issuing Economies," IMF Working Papers 2020/288, International Monetary Fund.

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    More about this item

    Keywords

    WP; monetary policy; Endogenous Financial Risk; DSGE models; Non-Linear Dynamics; Policy Evaluation; monetary policy reaction; surprise monetary policy tightening; inflation index; prices-low return; monetary policy surprise; equity constraint; monetary policy shock; deviations from fundamentals; utility function; price inflation index; monetary policy behavior; equity constraint bind; Financial sector; Asset prices; Stocks; Nonbank financial institutions; Inflation; Global;
    All these keywords.

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • G2 - Financial Economics - - Financial Institutions and Services
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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