NKV: A New Keynesian Model with Vulnerability
- (pp. 470-76)
AbstractWe 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.
CitationAdrian, 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
- 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