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Should monetary policy use its short-term policy rate to stabilize the growth in household credit and housing prices with the aim of promoting financial stability? We ask this question for the case of Canada. We find that to a first approximation, the answer is no— especially when the economy is slowing down.

Monetary policy --- Housing --- Econometric models. --- Prices --- Affordable housing --- Homes --- Houses --- Housing needs --- Residences --- Slum clearance --- Urban housing --- City planning --- Dwellings --- Human settlements --- Monetary management --- Economic policy --- Currency boards --- Money supply --- Social aspects --- Banks and Banking --- Finance: General --- Financial Risk Management --- Inflation --- Money and Monetary Policy --- Monetary Policy --- Central Banks and Their Policies --- Financial Markets and the Macroeconomy --- Policy Objectives --- Policy Designs and Consistency --- Policy Coordination --- Monetary Policy, Central Banking, and the Supply of Money and Credit: General --- Financial Crises --- Interest Rates: Determination, Term Structure, and Effects --- General Financial Markets: Government Policy and Regulation --- Price Level --- Deflation --- Monetary economics --- Economic & financial crises & disasters --- Banking --- Finance --- Macroeconomics --- Credit --- Financial crises --- Central bank policy rate --- Financial sector stability --- Money --- Financial services --- Financial sector policy and analysis --- Interest rates --- Financial services industry --- Canada

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We introduce time-varying systemic risk in an otherwise standard New-Keynesian model to study whether a simple leaning-against-the-wind policy can reduce systemic risk and improve welfare. We find that an unexpected increase in policy rates reduces output, inflation, and asset prices without fundamentally mitigating financial risks. We also find that while a systematic monetary policy reaction can improve welfare, it is too simplistic: (1) it is highly sensitive to parameters of the model and (2) is detrimental in the presence of falling asset prices. Macroprudential policy, similar to a countercyclical capital requirement, is more robust and leads to higher welfare gains.

International finance. --- International Monetary Fund. --- Monetary policy -- Econometric models. --- Money --- Finance --- Business & Economics --- Inflation --- Investments: Stocks --- Macroeconomics --- Industries: Financial Services --- Monetary Policy --- Central Banks and Their Policies --- Financial Markets and the Macroeconomy --- Policy Objectives --- Policy Designs and Consistency --- Policy Coordination --- Financial Institutions and Services: General --- Price Level --- Deflation --- Pension Funds --- Non-bank Financial Institutions --- Financial Instruments --- Institutional Investors --- Investment & securities --- Financial sector --- Asset prices --- Stocks --- Nonbank financial institutions --- Economic sectors --- Prices --- Financial institutions --- Financial services industry --- United States

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This paper specifies how to do policy simulations with alternative instrument-rate paths in DSGE models such as Ramses, the Riksbank's main model for policy analysis and forecasting. The new element is that these alternative instrument-rate paths are anticipated by the private sector. Such simulations correspond to situations where the Riksbank transparently announces that it plans to implement a particular instrument-rate path and where this announcement is believed by the private sector. Previous methods have instead implemented alternative instrument-rate paths by adding unanticipated shocks to an instrument rule, as in the method of modest interventions by Leeper and Zha (2003). This corresponds to a very different situation where the Riksbank would nontransparently and secretly plan to implement deviations from an announced instrument rule. Such deviations are in practical simulations normally both serially correlated and large, which seems inconsistent with the assumption that they would remain unanticipated by the private sector. Simulations with anticipated instrument-rate paths seem more relevant for the transparent flexible inflation targeting that the Riksbank conducts. We provide an algorithm for the computation of policy simulations with arbitrary restrictions on nominal and real instrument-rate paths for an arbitrary number of periods after which a given policy rule, including targeting rules and explicit, implicit, or forecast-based instrument rules is implemented. When inflation projections are sufficiently sensitive to the real interest-rate path, restrictions on real interest-rate paths provide more intuitive and robust results, whereas restrictions on nominal interest-rate path may provide somewhat counter-intuitive results.

Zonder onderwerpscode: economie

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Zonder onderwerpscode: economie