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Macro Risk Premium and Intermediary Balance Sheet Quantities

  • Tobias Adrian
  • Emanuel Moench
  • Hyun Song Shin

The macro risk premium measures the threshold return for real activity that receives funding from savers. The balance sheet conditions of financial intermediaries provide a window on the macro risk premium. The tightness of intermediaries’ balance sheet constraints determines their “risk appetite,” which in turn, determines the set of real projects that receive funding, and hence determines the supply of credit. Monetary policy affects risk appetite by changing intermediaries’ ability to leverage their capital. This paper estimates the time-varying risk appetite of financial intermediaries for the United States, Germany, United Kingdom, and Japan, and studies the joint dynamics of risk appetite with macroeconomic aggregates for the United States. The paper argues that risk appetite is an important indicator for monetary conditions.

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Article provided by Palgrave Macmillan in its journal IMF Economic Review.

Volume (Year): 58 (2010)
Issue (Month): 1 (August)
Pages: 179-207

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Handle: RePEc:pal:imfecr:v:58:y:2010:i:1:p:179-207
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  1. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
  2. Vasco Cúrdia & Michael Woodford, 2008. "Credit frictions and optimal monetary policy," Working Paper Research 146, National Bank of Belgium.
  3. Ben S. Bernanke & Alan S. Blinder, 1989. "The federal funds rate and the channels of monetary transmission," Working Papers 89-10, Federal Reserve Bank of Philadelphia.
  4. Thomas Laubach and John C. Williams, 2001. "Measuring the Natural Rate of Interest," Computing in Economics and Finance 2001 35, Society for Computational Economics.
  5. Arturo Estrella & Gikas A. Hardouvelis, 1989. "The term structure as a predictor of real economic activity," Research Paper 8907, Federal Reserve Bank of New York.
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