Systemic Risk: A New Trade-Off for Monetary Policy?

47 Pages Posted: 21 Jul 2015

See all articles by Stefan Laseen

Stefan Laseen

Sveriges Riksbank - Monetary Policy Department

Andreas Pescatori

International Monetary Fund (IMF)

Jarkko Turunen

International Monetary Fund

Multiple version iconThere are 2 versions of this paper

Date Written: June 2015

Abstract

We introduce time-varying systemic risk in an otherwise standard New-Keynesian model to study whether a simple leaning-against-the-wind policy can reduce systemic risk and improve welfare. We find that an unexpected increase in policy rates reduces output, inflation, and asset prices without fundamentally mitigating financial risks. We also find that while a systematic monetary policy reaction can improve welfare, it is too simplistic: (1) it is highly sensitive to parameters of the model and (2) is detrimental in the presence of falling asset prices. Macroprudential policy, similar to a countercyclical capital requirement, is more robust and leads to higher welfare gains.

Keywords: Systemic risk assessment, Monetary policy, Macroprudential Policy, Financial sector, General equilibrium models, Endogenous Financial Risk, DSGE models, Non-Linear Dynamics, Policy Evaluation, welfare, prices, equity, variables, capital, consumption

Suggested Citation

Laseen, Stefan and Pescatori, Andreas and Turunen, Jarkko, Systemic Risk: A New Trade-Off for Monetary Policy? (June 2015). IMF Working Paper No. 15/142, Available at SSRN: https://ssrn.com/abstract=2633928

Stefan Laseen (Contact Author)

Sveriges Riksbank - Monetary Policy Department ( email )

S-103 37 Stockholm
Sweden

Andreas Pescatori

International Monetary Fund (IMF) ( email )

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

Jarkko Turunen

International Monetary Fund ( email )

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

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
67
Abstract Views
444
rank
283,039
PlumX Metrics