Cyclical risk aversion, precautionary saving and monetary policy

Working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 06 April 2011

Working Paper No. 418
By Bianca De Paoli and Pawel Zabczyk

This paper analyses the conduct of monetary policy in an environment in which cyclical swings in risk appetite affect households’ propensity to save. It uses a New Keynesian model featuring external habit formation to show that taking note of precautionary saving motives justifies an accommodative policy bias in the face of persistent, adverse disturbances. Equally, policy should be more restrictive following positive shocks.

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