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Global price of risk and stabilization policies

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  • Adrian, Tobias

    (Federal Reserve Bank of New York)

  • Stackman, Daniel

    (Federal Reserve Bank of New York)

  • Vogt, Erik

    (Federal Reserve Bank of New York)

Abstract

We estimate a highly significant price of risk that forecasts global stock and bond returns as a nonlinear function of the CBOE Volatility Index (VIX). We show that countries’ exposure to the global price of risk is related to macroeconomic risks as measured by output, credit, and inflation volatility, the magnitude of financial crises, and stock and bond market downside risk. Higher exposure to the global price of risk corresponds to both higher output volatility and higher output growth. We document that the transmission of the global price of risk to macroeconomic outcomes is mitigated by the magnitude of stabilization in the Taylor rule, the degree of countercyclicality of fiscal policy, and countries’ tendencies to employ prudential regulations. The estimated magnitudes are quantitatively important and significant, with large cross-sectional explanatory power. Our findings suggest that macroeconomic and financial stability policies should be considered jointly.

Suggested Citation

  • Adrian, Tobias & Stackman, Daniel & Vogt, Erik, 2016. "Global price of risk and stabilization policies," Staff Reports 786, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednsr:786
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    Cited by:

    1. Maurice Obstfeld, 2019. "Global Dimensions of U.S. Monetary Policy," NBER Working Papers 26039, National Bureau of Economic Research, Inc.
    2. Powell, Jerome H., 2018. "Monetary Policy Influences on Global Financial Conditions and International Capital Flows : a speech at "Challenges for Monetary Policy and the GFSN in an Evolving Global Economy" Eighth Hig," Speech 1000, Board of Governors of the Federal Reserve System (U.S.).

    More about this item

    Keywords

    financial stability; monetary policy; fiscal policy; regulatory policy;

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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