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A Model of Monetary Policy and Risk Premia

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  • Itamar Drechsler
  • Alexi Savov
  • Philipp Schnabl

Abstract

We develop a dynamic asset pricing model in which monetary policy affects the risk premium component of the cost of capital. Risk-tolerant agents (banks) borrow from risk-averse agents (i.e. take deposits) to fund levered investments. Leverage exposes banks to funding risk, which they insure by holding liquidity buffers. By changing the nominal rate the central bank influences the liquidity premium in financial markets, and hence the cost of taking leverage. Lower nominal rates make liquidity cheaper and raise leverage, resulting in lower risk premia and higher asset prices, volatility, investment, and growth. We analyze forward guidance, a "Greenspan put", and the yield curve.

Suggested Citation

  • Itamar Drechsler & Alexi Savov & Philipp Schnabl, 2014. "A Model of Monetary Policy and Risk Premia," NBER Working Papers 20141, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:20141
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    Cited by:

    1. Itamar Drechsler & Alexi Savov & Philipp Schnabl, 2017. "The Deposits Channel of Monetary Policy," The Quarterly Journal of Economics, Oxford University Press, vol. 132(4), pages 1819-1876.
    2. Elenev, Vadim & Landvoigt, Tim & Van Nieuwerburgh, Stijn, 2016. "Phasing out the GSEs," Journal of Monetary Economics, Elsevier, vol. 81(C), pages 111-132.
    3. Adrian, Tobias & Liang, J. Nellie, 2014. "Monetary policy, financial conditions, and financial stability," Staff Reports 690, Federal Reserve Bank of New York, revised 01 Dec 2016.
    4. Yulei Peng & Anastasia Zervou, 2014. "Monetary Policy Rules and the Equity Premium," Working Papers 20141115_001, Texas A&M University, Department of Economics.
    5. Yuliy Sannikov & Markus Brunnermeier, 2012. "The I Theory of Money," 2012 Meeting Papers 411, Society for Economic Dynamics.
    6. Andreas Neuhierl & Michael Weber, 2017. "Monetary Momentum," CESifo Working Paper Series 6648, CESifo Group Munich.
    7. Cycon, Lisa & Koetter, Michael, 2015. "Monetary policy under the microscope: Intra-bank transmission of asset purchase programs of the ECB," Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 112831, Verein für Socialpolitik / German Economic Association.
    8. Viral Acharya & Itamar Drechsler & Philipp Schnabl, 2014. "A Pyrrhic Victory? Bank Bailouts and Sovereign Credit Risk," Journal of Finance, American Finance Association, vol. 69(6), pages 2689-2739, December.
    9. Markus K. Brunnermeier & Yuliy Sannikov, 2016. "Macro, Money and Finance: A Continuous Time Approach," NBER Working Papers 22343, National Bureau of Economic Research, Inc.
    10. Michael Weber & Andreas Neuhierl, 2016. "Monetary Policy and the Stock Market: Time-Series Evidence," Working Papers 2016-26, Becker Friedman Institute for Research In Economics.
    11. Anders Vredin, 2015. "Inflation targeting and financial stability: providing policymakers with relevant information," BIS Working Papers 503, Bank for International Settlements.
    12. repec:eee:ememar:v:31:y:2017:i:c:p:116-140 is not listed on IDEAS
    13. Gabriel Chodorow-Reich, 2014. "Effects of Unconventional Monetary Policy on Financial Institutions," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 45(1 (Spring), pages 155-227.
    14. Alexandros Kontonikas & Paulo Maio & Zivile Zekaite, 2016. "Monetary Policy and Corporate Bond Returns," Working Papers 2016_05, Business School - Economics, University of Glasgow.
    15. Alan Moreira & Alexi Savov, 2014. "The Macroeconomics of Shadow Banking," NBER Working Papers 20335, National Bureau of Economic Research, Inc.
    16. Francesco Bianchi & Martin Lettau & Sydney C. Ludvigson, 2016. "Monetary Policy and Asset Valuation," NBER Working Papers 22572, National Bureau of Economic Research, Inc.
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    18. Chen, Minghua & Wu, Ji & Jeon, Bang Nam & Wang, Rui, 2017. "Monetary policy and bank risk-taking: Evidence from emerging economies," Emerging Markets Review, Elsevier, vol. 31(C), pages 116-140.
    19. Stefan Nagel, 2016. "The Liquidity Premium of Near-Money Assets," The Quarterly Journal of Economics, Oxford University Press, vol. 131(4), pages 1927-1971.

    More about this item

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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