Here.
This is a theory paper.
We introduce time-varying systemic risk (‡ la He and Krishnamurthy, 2014) in an otherwise standard New-Keynesian model to study whether simple leaning-against-the-wind interest rate rules can reduce systemic risk and improve welfare. We Önd that while Önancial sector leverage contains additional information about the state of the economy that is not captured in ináation and output leaning against Önancial variables can only marginally improve welfare because rules are detrimental in the presence of falling asset prices. An optimal macroprudential policy, similar to a countercyclical capital requirement, can eliminate systemic risk raising welfare by about 1.5%. Also, a surprise monetary policy tightening does not necessarily reduce systemic risk, especially during bad times. Finally, a volatility paradox a la Brunnermeier and Sannikov (2014) arises when monetary policy tries to excessively stabilize output.
From:
Stefan Laséen
Sveriges Riksbank
Andrea Pescatori
Jarkko Turunen
International Monetary Fund
This is a theory paper.
We introduce time-varying systemic risk (‡ la He and Krishnamurthy, 2014) in an otherwise standard New-Keynesian model to study whether simple leaning-against-the-wind interest rate rules can reduce systemic risk and improve welfare. We Önd that while Önancial sector leverage contains additional information about the state of the economy that is not captured in ináation and output leaning against Önancial variables can only marginally improve welfare because rules are detrimental in the presence of falling asset prices. An optimal macroprudential policy, similar to a countercyclical capital requirement, can eliminate systemic risk raising welfare by about 1.5%. Also, a surprise monetary policy tightening does not necessarily reduce systemic risk, especially during bad times. Finally, a volatility paradox a la Brunnermeier and Sannikov (2014) arises when monetary policy tries to excessively stabilize output.
From:
Stefan Laséen
Sveriges Riksbank
Andrea Pescatori
Jarkko Turunen
International Monetary Fund