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Managing Macrofinancial Risk

Author

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  • Mr. Tobias Adrian
  • Mr. Francis Vitek

Abstract

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.

Suggested Citation

  • Mr. Tobias Adrian & Mr. Francis Vitek, 2020. "Managing Macrofinancial Risk," IMF Working Papers 2020/151, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2020/151
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    Citations

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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. 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).
    3. 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).

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