In deciding the monetary policy stance, central bankers need to evaluate carefully the risks the current economic situation poses to price stability. We propose to regard the central banker as a risk manager who aims to contain inflation within pre-specified bounds. We develop formal tools of...

This paper studies the impact of major ECB monetary policy announcements on the portfolio allocation of euro area fund investors, using daily data between 2012 and mid-2016, a period that includes a variety of unconventional measures. We distinguish between active portfolio reallocation, driven...

We study how financial market efficiency affects a measure of diversification of output across industrial sectors borrowed from the portfolio allocation literature. Using data on sector-level value added for a wide cross section of countries and for various levels of disaggregation, we construct...

Two approaches are considered to incorporate judgment in DSGE models. First, Bayesian estimation indirectly imposes judgment via priors on model parameters, which are then mapped into a judgmental interest rate decision. Standard priors are shown to be associated with highly unrealistic...

Macro-prudential authorities need to assess medium-term downside risks to the real economy, caused by severe financial shocks. Before activating policy measures, they also need to consider their short-term negative impact. This gives rise to a risk management problem, an inter-temporal trade-off...

Macroprudential policymakers assess medium-term downside risks to the real economy arising from financial imbalances and implement policies aimed at managing those risks. In doing so, they face an inherent intertemporal trade-off between the expected growth and downside risks. This paper reviews...

We study the macroeconomic consequences of financial shocks and increase in economic risk using a quantile vector autoregression. Financial shocks have a negative, but asymmetric impact on the real economy: they substantially increase growth at risk, but have limited impact on upside potential....