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.
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|Size: ||4.6 MB|
|Publisher: ||INTERNATIONAL MONETARY FUND|
|Date published: || 2015|
|ISBN: ||9781513571218 (DRM-EPUB)|
|Read Aloud: ||not allowed|