GDP at Risk: A Framework for Monetary Policy Responses to Asset Price Movements

25 Pages Posted: 14 Jul 2006

See all articles by Stephen G. Cecchetti

Stephen G. Cecchetti

Brandeis International Business School; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Date Written: March 2006


In analyzing the macroeconomic impact of asset price booms and crashes, it is the disasters that are the true concern. This suggests a different approach to risk; one based on examining the keeping the probability of output deviating from its trend (or price level deviations from its target trend) over some time horizon below some fixed threshold. Policy responses should be built in order to keep this "GDP at risk", or it analog "Price-level at risk", sufficiently small. In this paper I use data from a broad cross-section of countries to examine GDP at risk and pricelevel at risk arising from booms and crashes in equity and property markets. I show that the distribution of GDP and price-level deviations from their trends have fat tails, so the probability of extreme events is higher than implied by a normal distribution. Specifically, housing booms create outsized risks of output declines. This means that policymakers who are intent on averting catastrophes should react. The question is: How?

Suggested Citation

Cecchetti, Stephen G., GDP at Risk: A Framework for Monetary Policy Responses to Asset Price Movements (March 2006). NBER Working Paper No. C0012. Available at SSRN:

Stephen G. Cecchetti (Contact Author)

Brandeis International Business School ( email )

415 South Street
Waltham, MA 02453
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States
212-720-8629 (Phone)
212-720-2630 (Fax)

Centre for Economic Policy Research (CEPR) ( email )

United Kingdom

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