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Macro risk premium and intermediary balance sheet quantities

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  • Tobias Adrian
  • Emanuel Moench
  • Hyun Song Shin

Abstract

The macro risk premium measures the threshold return for real activity that receives funding from savers. We base our argument in this paper on the relationship between the macro risk premium and the growth of financial intermediaries' balance sheets. The spare capacity of their balance sheets determines the intermediaries' risk appetite, which in turn determines the real projects that receive funding and, hence, the supply of credit. Monetary policy affects risk appetite by changing the ability of intermediaries to leverage their capital. We estimate the time-varying risk appetite of financial intermediaries for the United States, Germany, the United Kingdom, and Japan, and study the joint dynamics of risk appetite using macroeconomic aggregates for the United States. We argue that risk appetite is an important indicator of monetary conditions.

Suggested Citation

  • Tobias Adrian & Emanuel Moench & Hyun Song Shin, 2010. "Macro risk premium and intermediary balance sheet quantities," Staff Reports 428, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednsr:428
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    References listed on IDEAS

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    More about this item

    Keywords

    Monetary policy; Intermediation (Finance); Risk; Capital market; Credit;
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