Managing Macrofinancial Risk
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Summary:
We augment a linearized dynamic stochastic general equilibrium (DSGE) model with a tractable endogenous risk mechanism, to support the joint analysis of monetary and macroprudential policy. This state dependent conditional heteroskedasticity mechanism specifies the conditional variances of structural shocks as functions of the business or financial cycle. The resultant heteroskedastic linearized DSGE model preserves the satisfactory simulation and forecasting performance of its nested homoskedastic counterpart for the conditional means of endogenous variables, while substantially improving its goodness of fit to their conditional distributions. In particular, the model matches the key stylized facts of growth at risk. Accounting for state dependent conditional heteroskedasticity makes it optimal for monetary policy to respond more aggressively to the business cycle, and for macroprudential policy to manage the resilience of the banking sector more actively over the financial cycle.
Series:
Working Paper No. 2020/151
Subject:
Banking Financial institutions Financial sector policy and analysis Financial services Housing prices Macroprudential policy Mortgages Prices Production Production growth Short term interest rates
Frequency:
regular
English
Publication Date:
August 7, 2020
ISBN/ISSN:
9781513550893/1018-5941
Stock No:
WPIEA2020151
Pages:
60
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