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Monetary policy and the cyclicality of risk

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  • Gust, Christopher
  • López-Salido, David

Abstract

A dynamic general equilibrium model to study the relationship between monetary policy and movements in risk is developed. Variation in risk arises because households face fixed costs of transferring cash across financial accounts, implying that some households rebalance their portfolios infrequently. Accordingly, prices for risky assets respond sharply to aggregate shocks because only a relatively small subset of consumers are available to absorb these shocks. The model can account for both the mean and the volatility of returns on equity and the risk-free rate and generates a decline in the equity premium following an unanticipated easing of monetary policy.

Suggested Citation

  • Gust, Christopher & López-Salido, David, 2014. "Monetary policy and the cyclicality of risk," Journal of Monetary Economics, Elsevier, vol. 62(C), pages 59-75.
    • Handle: RePEc:eee:moneco:v:62:y:2014:i:c:p:59-75
    DOI: 10.1016/j.jmoneco.2013.11.008
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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Monetary policy and the cyclicality of risk
      by Christian Zimmermann in NEP-DGE blog on 2010-08-17 19:28:19

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    Cited by:

    1. Casper De Vries & Xuedong Wang & Casper G, de Vries, 2015. "Inflation, Endogenous Market Segmentation and the Term Structure of Interest Rates," CESifo Working Paper Series 5421, CESifo.
    2. Bingbing Dong, 2014. "Asset Pricing and Monetary Policy," 2014 Meeting Papers 881, Society for Economic Dynamics.
    3. Chien, YiLi & Naknoi, Kanda, 2015. "The risk premium and long-run global imbalances," Journal of Monetary Economics, Elsevier, vol. 76(C), pages 299-315.
    4. Peng, Yulei & Zervou, Anastasia, 2022. "Monetary policy rules and the equity premium in a segmented markets model," Journal of Macroeconomics, Elsevier, vol. 73(C).
    5. Olli-Matti Laine, 2023. "Monetary Policy and Stock Market Valuation," International Journal of Central Banking, International Journal of Central Banking, vol. 19(1), pages 365-416, March.
    6. Anthony M. Diercks, 2015. "The Equity Premium, Long-Run Risk, & Optimal Monetary Policy," Finance and Economics Discussion Series 2015-87, Board of Governors of the Federal Reserve System (U.S.).
    7. Gomez-Ruano, Gerardo, 2014. "Should Central Banks Take On Credit-Risk?," MPRA Paper 93633, University Library of Munich, Germany.
    8. Anthony Diercks, 2016. "The Equity Premium, Long-Run Risk, and Optimal Monetary Policy," 2016 Meeting Papers 207, Society for Economic Dynamics.
    9. repec:zbw:bofrdp:2020_016 is not listed on IDEAS
    10. Laine, Olli-Matti, 2022. "Evidence about the transmission of monetary policy," Bank of Finland Scientific Monographs, Bank of Finland, volume 0, number e53.
    11. Yulei Peng & Anastasia Zervou, 2014. "Monetary Policy Rules and the Equity Premium," Working Papers 20141115_001, Texas A&M University, Department of Economics.
    12. Dotsey, Michael & Guerron-Quintana, Pablo A., 2016. "Interest rates and prices in an inventory model of money with credit," Journal of Monetary Economics, Elsevier, vol. 83(C), pages 71-89.
    13. Laine, Olli-Matti, 2020. "Monetary policy and stock market valuation," Research Discussion Papers 16/2020, Bank of Finland.
    14. Julio Pindado & Ignacio Requejo & Juan C. Rivera, 2020. "Does money supply shape corporate capital structure? International evidence from a panel data analysis," The European Journal of Finance, Taylor & Francis Journals, vol. 26(6), pages 554-584, April.

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    More about this item

    Keywords

    Segmented markets; Equity premium; Monetary policy rules;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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