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Growth-at-risk and macroprudential policy design

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  • Suarez, Javier

Abstract

This paper explores the foundations for the application of the empirical growth-at-risk (GaR) approach to the assessment and design of macroprudential policies. It starts considering a stylized benchmark linear specification of the empirical GaR approach in combination with a linear–quadratic social welfare criterion that rewards expected GDP growth and penalizes the gap between expected GDP growth and GaR. If the growth rate follows a normal distribution, this welfare criterion can be microfounded as consistent with expected utility maximization under preferences for GDP levels exhibiting constant absolute risk aversion. The benchmark formulation implies an optimal policy rule linear in the risk indicator and an optimal gap between expected growth and GaR that does not depend on the time-varying risk indicator and is inversely related to the cost-effectiveness of macroprudential policy and the risk preference parameter. Extensions of the benchmark formulation show the potential to adapt the analysis and its insights to the richer specifications typically considered in empirical work.

Suggested Citation

  • Suarez, Javier, 2022. "Growth-at-risk and macroprudential policy design," Journal of Financial Stability, Elsevier, vol. 60(C).
    • Handle: RePEc:eee:finsta:v:60:y:2022:i:c:s1572308922000353
    DOI: 10.1016/j.jfs.2022.101008
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    Cited by:

    1. Xu, Qifa & Xu, Mengnan & Jiang, Cuixia & Fu, Weizhong, 2023. "Mixed-frequency Growth-at-Risk with the MIDAS-QR method: Evidence from China," Economic Systems, Elsevier, vol. 47(4).
    2. Fernández-Gallardo, Álvaro & Lloyd, Simon & Manuel, Ed, 2023. "The transmission of macroprudential policy in the tails: evidence from a narrative approach," Bank of England working papers 1027, Bank of England.
    3. Olivier de Bandt & Bora Durdu & Hibiki Ichiue & Yasin Mimir & Jolan Mohimont & Kalin Nikolov & Sigrid Roehrs & Jean-Guillaume Sahuc & Valerio Scalone & Michael Straughan, 2024. "Assessing the Impact of Basel III: Review of Transmission Channels and Insights from Policy Models," International Journal of Central Banking, International Journal of Central Banking, vol. 20(1), pages 1-52, February.
    4. Martin Gachter & Elias Hasler & Florian Huber, 2023. "A tale of two tails: 130 years of growth-at-risk," Papers 2302.08920, arXiv.org.
    5. Tibor Szendrei & Arnab Bhattacharjee & Mark E. Schaffer, 2024. "MIDAS-QR with 2-Dimensional Structure," Papers 2406.15157, arXiv.org.
    6. Gai, Prasanna & Haworth, Cameron, 2023. "Macroprudential policymakers with cautious expectations," Economics Letters, Elsevier, vol. 229(C).
    7. Wang, Bo & Xiao, Yang, 2023. "The term effect of financial cycle variables on GDP growth," Journal of International Money and Finance, Elsevier, vol. 139(C).
    8. Górajski, Mariusz & Kuchta, Zbigniew, 2023. "Coordination and non-coordination risks of monetary and macroprudential authorities: A robust welfare analysis," The North American Journal of Economics and Finance, Elsevier, vol. 67(C).

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    More about this item

    Keywords

    Macroprudential policy; Policy stance; Growth-at-risk; Quantile regressions;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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