Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/210742 
Year of Publication: 
2019
Series/Report no.: 
Staff Report No. 890
Publisher: 
Federal Reserve Bank of New York, New York, NY
Abstract: 
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.
Subjects: 
monetary policy
financial conditions
financial stability
JEL: 
E52
Document Type: 
Working Paper

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