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

By Stefan Laseen, Andrea Pescatori, Jarkko Turunen

June 30, 2015

Preview Citation

Format: Chicago

Stefan Laseen, Andrea Pescatori, and Jarkko Turunen. Systemic Risk: A New Trade-off for Monetary Policy?, (USA: International Monetary Fund, 2015) accessed September 18, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Asset prices, Economic sectors, Financial institutions, Financial sector, Inflation, Nonbank financial institutions, Prices, Stocks

Keywords: Asset prices, Deviations from fundamentals, DSGE models, Endogenous Financial Risk, Equity constraint, Equity constraint bind, Financial sector, Global, Inflation, Inflation index, Monetary policy, Monetary policy behavior, Monetary policy reaction, Monetary policy shock, Monetary policy surprise, Nonbank financial institutions, Non-Linear Dynamics, Policy Evaluation, Price inflation index, Prices-low return, Stocks, Surprise monetary policy tightening, Utility function, WP

Publication Details

Pages:

46
Volume:

---
DOI:

---
Issue:

---
Series:

Working Paper No. 2015/142
Stock No:

WPIEA2015142
ISBN:

9781513579245
ISSN:

1018-5941

FACTSHEETS

RESOURCES

TOPICS

Flagship Publications

Other Publications

IMF reports and publications by country

Regional Offices

All News

See Also

For Journalists

Press Center

RESOURCES

FLAGSHIPS

KEY SERIES

IMF NOTES

IMF Working Papers