Time-Varying Relationship between Conventional and Unconventional Monetary Policies and Risk Aversion: International Evidence from Time- and Frequency-Domains

This paper analyzes the time-varying relationship between risk aversion and both conventional and unconventional monetary policy, using Shadow Short Rates, in an international context and at different frequencies during the daily period of 1986-2016, based on a wavelet coherency analysis. Our main results suggest the existence of a dynamic relationship between the two variables depending on timescales and on the periods. Thus, a short-run negative relationship leading from the risk aversion variable to the monetary policy measure is found for most of the period, suggesting that monetary policy reacts more aggressively in period of high risk aversion. Furthermore, during the financial crisis, we find a long-run negative relationship leading from the monetary policy to the risk aversion index, suggesting that a lax monetary policy could lead to financial instability. US monetary policy has also significant effects on the risk aversion rates in the Euro Area, Japan and the UK.