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Marriott Marquis, Grand Ballroom 2
American Economic Association
Macroprudential Policies and Monetary Policy
Sunday, Jan. 5, 2020 8:00 AM - 10:00 AM (PDT)
- Chair: Nellie Liang, Brookings Institution
Monetary and Macroprudential Policy with Endogenous Risk
AbstractWe extend the New Keynesian (NK) model to include endogenous risk. The conditional volatility of the output gap is proportional to the price of risk, giving rise to a "vulnerability channel" of monetary policy: lower interest rates not only shift consumption intertemporally, but also conditional output risk. Policy makers thus face an intertemporal risk-return tradeoff: via the impact on risk-taking, easy monetary policy lowers short-term downside risks to growth, but increases medium-term risks. The model fits estimates of the conditional output gap term structure and can be used to jointly consider monetary and macroprudential policy. The policy prescriptions are very different from those in the standard NK model: central banks' focus purely on inflation and output-gap stabilization can lead to financial and real instability. Macroprudential measures can help reduce the intertemporal risk-return tradeoff of the central bank created by the vulnerability channel.
Borrower and Lender Resilience
AbstractWe consider the efficacy of various macroprudential policies. To do so, we build a model in which a credit contraction can be caused by a fall in credit demand, supply, or both. Due to an aggregate demand externality, this generates a need for prudential policies that operate both on the borrowers' and on the lenders' side. In particular, borrower deleveraging can amplify shocks and if (as in the US), the regulator has no tools for addressing this possibility, that macroprudential policy will be limited in its effectiveness.
Federal Reserve Bank of San Francisco
University of Virginia
- E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit
- G2 - Financial Institutions and Services