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Cyclical Risk Aversion, Precautionary Saving, and Monetary Policy
Author(s) -
DE PAOLI BIANCA,
ZABCZYK PAWEL
Publication year - 2013
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/j.1538-4616.2012.00560.x
Subject(s) - economics , monetary economics , monetary policy , habit , new keynesian economics , precautionary savings , risk aversion (psychology) , affect (linguistics) , productivity , interest rate , macroeconomics , financial economics , expected utility hypothesis , psychology , communication , market liquidity , psychotherapist
This paper analyzes 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—that is “lean against the wind”—following positive shocks. Under sufficiently persistent habits it is, in fact, optimal to increase interest rates following a rise in productivity.