IMF Working Papers

Managing Macrofinancial Risk

By Tobias Adrian, Francis Vitek

August 7, 2020

Download PDF

Preview Citation

Format: Chicago

Tobias Adrian, and Francis Vitek. Managing Macrofinancial Risk, (USA: International Monetary Fund, 2020) accessed December 12, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

We augment a linearized dynamic stochastic general equilibrium (DSGE) model with a tractable endogenous risk mechanism, to support the joint analysis of monetary and macroprudential policy. This state dependent conditional heteroskedasticity mechanism specifies the conditional variances of structural shocks as functions of the business or financial cycle. The resultant heteroskedastic linearized DSGE model preserves the satisfactory simulation and forecasting performance of its nested homoskedastic counterpart for the conditional means of endogenous variables, while substantially improving its goodness of fit to their conditional distributions. In particular, the model matches the key stylized facts of growth at risk. Accounting for state dependent conditional heteroskedasticity makes it optimal for monetary policy to respond more aggressively to the business cycle, and for macroprudential policy to manage the resilience of the banking sector more actively over the financial cycle.

Subject: Banking, Financial institutions, Financial sector policy and analysis, Financial services, Housing prices, Macroprudential policy, Mortgages, Prices, Production, Production growth, Short term interest rates

Keywords: Bank credit, Business cycle, Capital stock, Constant returns to scale, Default rate relationship, Default shock, Dynamic stochastic general equilibrium model, Endogenous risk, Financial cycle, Gross domestic product, Growth at risk, Housing prices, Loan rate, Macroprudential policy, Marginal revenue, Markup shock, Math display, Maximization problem, Monetary policy, Mortgages, Output gap, Price level, Probability density function, Production growth, Rate determination, Risk premium, Short term interest rates, State dependent conditional heteroskedasticity, Stochastic process, Utility function, WP

Publication Details

  • Pages:

    60

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 2020/151

  • Stock No:

    WPIEA2020151

  • ISBN:

    9781513550893

  • ISSN:

    1018-5941