Monetary Policy and Financial Conditions: A Cross-Country Study

24 Pages Posted: 5 Feb 2018

See all articles by Tobias Adrian

Tobias Adrian

International Monetary Fund

Fernando Duarte

Federal Reserve Bank of New York

Federico Grinberg

International Monetary Fund

Tommaso Mancini Griffoli

International Monetary Fund (IMF)

Date Written: February 2018

Abstract

Loose financiall conditions forecast high output growth and low output volatility up to six quarters into the future, generating time varying downside risk to the output gap which we measure by GDP-at-Risk (GaR). This finding is robust across countries, conditioning variables, and time periods. We study the implications for monetary policy in a reduced form New Keynesian model with financial intermediaries that are subject to a Value at Risk (VaR) constraint. Optimal monetary policy depends on the magnitude downside risk to GDP, as it impacts the consumption-savings decision via the Euler constraint, and the financial conditions via the tightness of the VaR constraint. The optimal monetary policy rule exhibits a pronounced response to shifts in financial conditions for most countries in our sample. Welfare gains from taking financial conditions into account are shown to be sizable.

Keywords: financial conditions, Financial Stability, monetary policy

JEL Classification: E52

Suggested Citation

Adrian, Tobias and Duarte, Fernando and Grinberg, Federico and Mancini Griffoli, Tommaso, Monetary Policy and Financial Conditions: A Cross-Country Study (February 2018). CEPR Discussion Paper No. DP12681, Available at SSRN: https://ssrn.com/abstract=3118329

Tobias Adrian (Contact Author)

International Monetary Fund ( email )

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

HOME PAGE: http://www.tobiasadrian.com

Fernando Duarte

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

HOME PAGE: http://www.newyorkfed.org/research/economists/duarte/index.html

Federico Grinberg

International Monetary Fund ( email )

700 19th St NW
Washington, DC 20431
United States

Tommaso Mancini Griffoli

International Monetary Fund (IMF) ( email )

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

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