Monetary policy and financial conditions: A cross-country study

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Staff Report ; No. 890

Classification and Topics

• Classification: Wirtschaft ; Monetary Policy
• Subject: monetary policy ; financial conditions ; financial stability

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Adrian, Tobias ; Duarte, Fernando ; Grinberg, Federico ; Mancini Griffoli, Tommaso
• Event: Veröffentlichung
• (who): Federal Reserve Bank of New York
• (where): New York, NY
• (when): 2019

Further information

• Handle: http://hdl.handle.net/10419/210742
• Last update: 10.03.2025, 11:41 AM CET