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How to Manage Macroeconomic and Financial Stability Risks: A New Framework

Author

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  • Thibaut Duprey
  • Alexander Ueberfeldt

Abstract

Monetary policy decisions need to consider all potential outcomes, not just the most likely path for the economy. This is especially true in the presence of elevated financial system vulnerabilities, which lead to increased downside risks for future growth. In a novel risk-management framework, we decompose the outlook for the distribution of future gross domestic product (GDP) growth into macroeconomic and financial stability risks. When analyzing the efficacy of policy tools, we find that macroprudential tightening is substantially more effective than monetary policy at reducing downside risks to future GDP growth.

Suggested Citation

  • Thibaut Duprey & Alexander Ueberfeldt, 2018. "How to Manage Macroeconomic and Financial Stability Risks: A New Framework," Staff Analytical Notes 2018-11, Bank of Canada.
    • Handle: RePEc:bca:bocsan:18-11
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    References listed on IDEAS

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    1. Gregory H. Bauer & Eleonora Granziera, 2017. "Monetary Policy, Private Debt, and Financial Stability Risks," International Journal of Central Banking, International Journal of Central Banking, vol. 13(3), pages 337-373, September.
    2. Stephan Kohns, 2017. "Monetary Policy and Financial Stability," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 15(1), pages 17-18, 04.
    3. repec:ces:ifodic:v:15:y:2017:i:1:p:19307486 is not listed on IDEAS
    4. Allen, Jason & Grieder, Timothy & Peterson, Brian & Roberts, Tom, 2020. "The impact of macroprudential housing finance tools in canada," Journal of Financial Intermediation, Elsevier, vol. 42(C).
    5. Stephen S. Poloz, 2014. "Integrating Uncertainty and Monetary Policy-Making: A Practitioner’s Perspective," Discussion Papers 14-6, Bank of Canada.
    6. Thibaut Duprey, 2018. "Asymmetric Risks to the Economic Outlook Arising from Financial System Vulnerabilities," Staff Analytical Notes 2018-6, Bank of Canada.
    7. André Binette & Dmitri Tchebotarev, 2017. "Evaluating Real GDP Growth Forecasts in the Bank of Canada Monetary Policy Report," Staff Analytical Notes 17-21, Bank of Canada.
    8. Stephan Kohns, 2017. "Monetary Policy and Financial Stability," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 15(01), pages 17-18, April.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Jorge E. Galán, 2020. "The benefits are at the tail: uncovering the impact of macroprudential policy on growth-at-risk," Working Papers 2007, Banco de España.
    2. Poloz, Stephen S., 2021. "Technological progress and monetary policy: Managing the fourth industrial revolution," Journal of International Money and Finance, Elsevier, vol. 114(C).
    3. Aikman, David & Bridges, Jonathan & Hacioglu Hoke, Sinem & O’Neill, Cian & Raja, Akash, 2019. "Credit, capital and crises: a GDP-at-Risk approach," Bank of England working papers 824, Bank of England, revised 18 Oct 2019.
    4. Thomas J Carter & Rhys Mendes & Lawrence L Schembri, 2018. "Credibility, Flexibility and Renewal: The Evolution of Inflation Targeting in Canada," RBA Annual Conference Volume (Discontinued), in: John Simon & Maxwell Sutton (ed.),Central Bank Frameworks: Evolution or Revolution?, Reserve Bank of Australia.
    5. Luke Hartigan & Michelle Wright, 2021. "Financial Conditions and Downside Risk to Economic Activity in Australia," RBA Research Discussion Papers rdp2021-03, Reserve Bank of Australia.
    6. Marc-André Gosselin & Sharon Kozicki, 2023. "Making It Real: Bringing Research Models into Central Bank Projections," Discussion Papers 2023-29, Bank of Canada.
    7. Aikman, David & Bluwstein, Kristina & Karmakar, Sudipto, 2021. "A tail of three occasionally-binding constraints: a modelling approach to GDP-at-Risk," Bank of England working papers 931, Bank of England.
    8. Vladyslav Filatov, 2020. "A New Financial Stress Index for Ukraine," IHEID Working Papers 15-2020, Economics Section, The Graduate Institute of International Studies.
    9. CRISTE, Adina, 2019. "Ways Of Involving Central Bank In Supporting Economic Growth," Studii Financiare (Financial Studies), Centre of Financial and Monetary Research "Victor Slavescu", vol. 23(4), pages 86-99, December.
    10. Stephen S. Poloz, 2019. "Technological Progress and Monetary Policy: Managing the Fourth Industrial Revolution," Discussion Papers 2019-11, Bank of Canada.
    11. Deng, Chuang & Wu, Jian, 2023. "Macroeconomic downside risk and the effect of monetary policy," Finance Research Letters, Elsevier, vol. 54(C).
    12. Bochmann, Paul & Dieckelmann, Daniel & Fahr, Stephan & Ruzicka, Josef, 2023. "Financial stability considerations in the conduct of monetary policy," Working Paper Series 2870, European Central Bank.

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    More about this item

    Keywords

    Central bank research; Economic models; Financial stability; Financial system regulation and policies; Interest rates; Monetary Policy; Monetary policy framework;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G01 - Financial Economics - - General - - - Financial Crises

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