Cyclical Risk Aversion, Precautionary Saving and Monetary Policy
32 Pages Posted: 14 Apr 2011
Date Written: April 12, 2011
This paper analyses the conduct of monetary policy in an environment in which cyclical swings in risk appetite affect households’ propensity to save. It uses a New Keynesian model featuring external habit formation to show that taking note of precautionary saving motives justifies an accommodative policy bias in the face of persistent, adverse disturbances. Equally, policy should be more restrictive following positive shocks.
Keywords: Precautionary saving, monetary policy, cyclical risk aversion, macro-finance, DSGE models
JEL Classification: E32, G12
Suggested Citation: Suggested Citation