Managing Macrofinancial Risk

Managing Macrofinancial Risk
READ MORE...
Volume/Issue: Volume 2020 Issue 151
Publication date: August 2020
ISBN: 9781513550893
$18.00
Add to Cart by clicking price of the language and format you'd like to purchase
Available Languages and Formats
English
Prices in red indicate formats that are not yet available but are forthcoming.
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.