A0328
Title: Getting in all the cracks: Monetary policy, financial vulnerabilities, and macro risk
Authors: Andrea Ajello - Board of Governors of the Federal Reserve System (United States) [presenting]
Abstract: The effect of monetary policy on financial vulnerabilities is estimated, and the implications for macroeconomic tail risk are studied. We first extract a small set of common factors from a large dataset of financial vulnerability indicators, estimating a factor-augmented proxy SVAR to study the response of aggregate economic activity, inflation, and financial vulnerabilities to monetary policy shocks. We then estimate the effect of changes in the financial vulnerability factors on macroeconomic tail risk via quantile regressions. We find that an unexpected monetary policy tightening can lower asset valuation vulnerabilities in the short term and slow down credit growth in the medium term. As tighter monetary policy reduces asset valuation pressures, it does so at the cost of a sizable increase in macro tail risk in the short term that is only partially offset by a modest reduction in tail risk in the medium term, induced by a slowdown in credit growth.
