Monetary Policy and Financial Conditions: A Cross-Country Study

22 Pages Posted: 10 Jun 2019

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: June 2019

Abstract

Loose financial 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 of downside risk to GDP, as it impacts the consumption-savings decision via the Euler constraint, and 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: monetary policy, financial conditions, financial stability

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 (June 2019). FRB of New York Staff Report No. 890, June 2019. Available at SSRN: https://ssrn.com/abstract=3400916 or http://dx.doi.org/10.2139/ssrn.3400916

Tobias Adrian

International Monetary Fund ( email )

Kuwait

Fernando Duarte (Contact Author)

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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