Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/189941 
Year of Publication: 
2017
Series/Report no.: 
Sveriges Riksbank Working Paper Series No. 341
Publisher: 
Sveriges Riksbank, Stockholm
Abstract: 
We introduce time-varying systemic risk (à la He and Krishnamurthy, 2014) in an otherwise standard New-Keynesian model to study whether simple leaning-against-the-wind interest rate rules can reduce systemic risk and improve welfare. We find that while financial sector leverage contains additional information about the state of the economy that is not captured in in.ation and output leaning against financial variables can only marginally improve welfare because rules are detrimental in the presence of falling asset prices. An optimal macroprudential policy, similar to a countercyclical capital requirement, can eliminate systemic risk raising welfare by about 1.5%. Also, a surprise monetary policy tightening does not necessarily reduce systemic risk, especially during bad times. Finally, a volatility paradox a la Brunnermeier and Sannikov (2014) arises when monetary policy tries to excessively stabilize output.
Subjects: 
Monetary Policy
Endogenous Financial Risk
DSGE models
Non-Linear Dynamics
Policy Evaluation
JEL: 
E3
E52
E58
E44
E61
G2
G12
Document Type: 
Working Paper

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