The Risk Management Approach to Macro-Prudential Policy

76 Pages Posted: 3 Jun 2021

See all articles by Sulkhan Chavleishvili

Sulkhan Chavleishvili

European Central Bank (ECB); Aarhus University - School of Business and Social Sciences

Robert F. Engle

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER); New York University (NYU) - Volatility and Risk Institute

Stephan Fahr

European Central Bank

Manfred Kremer

European Central Bank (ECB)

Simone Manganelli

European Central Bank (ECB)

Bernd Schwaab

European Central Bank (ECB) - Directorate General Research

Date Written: June 1, 2021

Abstract

Macro-prudential authorities need to assess medium-term downside risks to the real economy, caused by severe financial shocks. Before activating policy measures, they also need to consider their short-term negative impact. This gives rise to a risk management problem, an inter-temporal trade-off between expected growth and downside risk. Predictive distributions are estimated with structural quantile vector autoregressive models that relate economic growth to measures of financial stress and the financial cycle. An empirical study with euro area and U.S. data shows how to construct indicators of macro-prudential policy stance and to assess when interventions may be beneficial.

JEL Classification: G21, C33

Suggested Citation

Chavleishvili, Sulkhan and Engle, Robert F. and Fahr, Stephan Alexander and Kremer, Manfred and Manganelli, Simone and Schwaab, Bernd, The Risk Management Approach to Macro-Prudential Policy (June 1, 2021). ECB Working Paper No. 2021/2565, Available at SSRN: https://ssrn.com/abstract=3859109 or http://dx.doi.org/10.2139/ssrn.3859109

Sulkhan Chavleishvili (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Aarhus University - School of Business and Social Sciences ( email )

Nordre Ringgade 1
Aarhus C, DK-8000
Denmark

Robert F. Engle

New York University (NYU) - Department of Finance

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

New York University (NYU) - Volatility and Risk Institute ( email )

44 West 4th Street
New York, NY 10012
United States

Stephan Alexander Fahr

European Central Bank ( email )

Kaiserstr. 29
Frankfurt am Main, DE 60066
Germany

Manfred Kremer

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
+49 69 1344 7065 (Phone)

Simone Manganelli

European Central Bank (ECB) ( email )

Kaiserstrasse 29
Frankfurt am Main, 60311
Germany

HOME PAGE: http://www.simonemanganelli.org

Bernd Schwaab

European Central Bank (ECB) - Directorate General Research ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

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