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  5. NKV: A New Keynesian Model with Vulnerability

AEA Papers and Proceedings

ISSN 2574-0768 (Print) | ISSN 2574-0776 (Online)

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NKV: A New Keynesian Model with Vulnerability

  • Tobias Adrian
  • Fernando Duarte
  • Nellie Liang
  • Pawel Zabczyk
AEA Papers and Proceedings
vol. 110, May 2020
(pp. 470–76)
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Abstract

We present a New Keynesian model with endogenous risk. The conditional output gap volatility depends on the price of risk, giving rise to a vulnerability channel of monetary policy. Lower interest rates not only shift consumption intertemporally but also shift conditional output risk. The model fits estimates of the conditional output gap distribution 1 to 12 quarters ahead and suggests an intertemporal risk return trade-off for policymakers. Via the impact on risk taking, easy monetary policy lowers short-term downside risks to growth but increases medium-term risks. The framework can be used to jointly consider macroprudential and monetary policy.

Citation

Adrian, Tobias, Fernando Duarte, Nellie Liang, and Pawel Zabczyk. 2020. "NKV: A New Keynesian Model with Vulnerability." AEA Papers and Proceedings 110: 470–76. DOI: 10.1257/pandp.20201023

Additional Materials

JEL Classification

  • E12 General Aggregative Models: Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
  • E23 Macroeconomics: Production
  • E43 Interest Rates: Determination, Term Structure, and Effects
  • E52 Monetary Policy