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

Author

Listed:
  • Besma Hkiri

    () (University of Jeddah, College of Business, Department of Finance and Economics, Jeddah, Saudi Arabia)

  • Juncal Cunado

    () (University of Navarra, School of Economics, Edificio Amigos, E-31080 Pamplona, Spain)

  • Mehmet Balcilar

    () (Department of Economics, Eastern Mediterranean University, Famagusta, via Mersin 10, Northern Cyprus, Turkey)

  • Rangan Gupta

    () (Department of Economics, University of Pretoria, Pretoria, 0002, South Africa)

Abstract

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.

Suggested Citation

  • Besma Hkiri & Juncal Cunado & Mehmet Balcilar & Rangan Gupta, 2019. "Time-Varying Relationship between Conventional and Unconventional Monetary Policies and Risk Aversion: International Evidence from Time- and Frequency-Domains," Working Papers 201965, University of Pretoria, Department of Economics.
  • Handle: RePEc:pre:wpaper:201965
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    More about this item

    Keywords

    Risk aversion; Monetary Policy; Wavelet coherency;

    JEL classification:

    • C49 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Other
    • 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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