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Liquidity, Risk Premia, and the Financial Transmission of Monetary Policy

Author

Listed:
  • Itamar Drechsler

    (The Wharton School, University of Pennsylvania, Philadelphia, PA 19104-6297, USA)

  • Alexi Savov

    (Stern School of Business, New York University, New York, NY 10012, USA)

  • Philipp Schnabl

    (Stern School of Business, New York University, New York, NY 10012, USA)

Abstract

In recent years, there has been a resurgence of research on the transmission of monetary policy through the financial system, fueled in part by empirical findings showing that monetary policy affects asset prices and the financial system in ways not explained by the New Keynesian paradigm. In particular, monetary policy appears to impact risk premia in stock and bond prices and to effectively control the liquidity premium in the economy (the cost of holding liquid assets). We review these findings and recent theories proposed to explain them, and we outline a conceptual framework that unifies them. The framework revolves around the central role of liquidity in risk sharing and explains how monetary policy governs its production and use within the financial sector.

Suggested Citation

  • Itamar Drechsler & Alexi Savov & Philipp Schnabl, 2018. "Liquidity, Risk Premia, and the Financial Transmission of Monetary Policy," Annual Review of Financial Economics, Annual Reviews, vol. 10(1), pages 309-328, November.
    • Handle: RePEc:anr:refeco:v:10:y:2018:p:309-328
    DOI: 10.1146/annurev-financial-110217-022833
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    Citations

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    Cited by:

    1. Jarrow, Robert & Lamichhane, Sujan, 2022. "Risk premia, asset price bubbles, and monetary policy," Journal of Financial Stability, Elsevier, vol. 60(C).
    2. Maxime Phillot & Dr. Samuel Reynard, 2021. "Monetary policy financial transmission and treasury liquidity premia," Working Papers 2021-14, Swiss National Bank.
    3. Eriksen, Jonas N., 2019. "Cross-sectional return dispersion and currency momentum," Journal of Empirical Finance, Elsevier, vol. 53(C), pages 91-108.
    4. Cafiso, Gianluca & Rivolta, Giulia, 2024. "Conventional monetary interventions through the credit channel and the rise of non-bank institutions," Economic Systems, Elsevier, vol. 48(1).
    5. Drechsler, Itamar & Savov, Alexi & Schnabl, Philipp, 2022. "How monetary policy shaped the housing boom," Journal of Financial Economics, Elsevier, vol. 144(3), pages 992-1021.
    6. Lopomo Beteto Wegner, Danilo, 2020. "Liquidity policies and financial fragility," International Review of Economics & Finance, Elsevier, vol. 70(C), pages 135-153.
    7. Usman Ghani & Md Kamal Hossain, 2021. "A comparative analysis of the results of financial liberalization in Central European countries: 1991-2020," International Journal of Science and Business, IJSAB International, vol. 5(9), pages 95-111.

    More about this item

    Keywords

    monetary policy; financial institutions; deposits channel; risk premia; liquidity premium; maturity transformation;
    All these keywords.

    JEL classification:

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

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