Cyclical Risk Aversion, Precautionary Saving and Monetary Policy

32 Pages Posted: 14 Apr 2011  

Bianca De Paoli

London School of Economics & Political Science (LSE) - Centre for Economic Performance (CEP)

Pawel Zabczyk

International Monetary Fund MCMMP

Date Written: April 12, 2011

Abstract

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

De Paoli, Bianca and Zabczyk, Pawel, Cyclical Risk Aversion, Precautionary Saving and Monetary Policy (April 12, 2011). Bank of England Working Paper No. 418. Available at SSRN: https://ssrn.com/abstract=1807982 or http://dx.doi.org/10.2139/ssrn.1807982

Bianca De Paoli (Contact Author)

London School of Economics & Political Science (LSE) - Centre for Economic Performance (CEP) ( email )

Houghton Street
London WC2A 2AE
United Kingdom

Pawel Zabczyk

International Monetary Fund MCMMP ( email )

International Monetary Fund
700 19th Street, N.W.
Washington, DC 20431
United States

HOME PAGE: http://pawel.zabczyk.com

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