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Monetary Policy Effects on Financial Risk Premia

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  • Paul Söderlind

Abstract

The effect of monetary policy on financial risk premia is analysed in a simple general equilibrium model with sticky wages and an optimising central bank. Analytical results show that equity risk premia and term premia are higher under inflation targeting than under output targeting, and that inflation risk premia are higher for policies that strike a balance between output and inflation stability (and achieve a social optimum) than for policies that target only one of them.

Suggested Citation

  • Paul Söderlind, 2006. "Monetary Policy Effects on Financial Risk Premia," University of St. Gallen Department of Economics working paper series 2006 2006-26, Department of Economics, University of St. Gallen.
    • Handle: RePEc:usg:dp2006:2006-26
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    References listed on IDEAS

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    1. Thorbecke, Willem, 1997. "On Stock Market Returns and Monetary Policy," Journal of Finance, American Finance Association, vol. 52(2), pages 635-654, June.
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    3. Bakshi, Gurdip S & Chen, Zhiwu, 1996. "Inflation, Asset Prices, and the Term Structure of Interest Rates in Monetary Economies," The Review of Financial Studies, Society for Financial Studies, vol. 9(1), pages 241-275.
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    5. Buraschi, Andrea & Jiltsov, Alexei, 2005. "Inflation risk premia and the expectations hypothesis," Journal of Financial Economics, Elsevier, vol. 75(2), pages 429-490, February.
    6. Soderlind, Paul, 2003. "Monetary policy and bond option pricing in an analytical RBC model," Journal of Economics and Business, Elsevier, vol. 55(4), pages 321-330.
    7. Peter Sellin, 2001. "Monetary Policy and the Stock Market: Theory and Empirical Evidence," Journal of Economic Surveys, Wiley Blackwell, vol. 15(4), pages 491-541, September.
    8. West, Kenneth D, 1986. "Targeting Nominal Income: A Note," Economic Journal, Royal Economic Society, vol. 96(384), pages 1077-1083, December.
    9. Boyle, Glenn W & Peterson, James D, 1995. "Monetary Policy, Aggregate Uncertainty, and the Stock Market," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(2), pages 570-582, May.
    10. Andersen, Torben G. & Bollerslev, Tim & Diebold, Francis X. & Vega, Clara, 2007. "Real-time price discovery in global stock, bond and foreign exchange markets," Journal of International Economics, Elsevier, vol. 73(2), pages 251-277, November.
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    Cited by:

    1. Borio, Claudio & Zhu, Haibin, 2012. "Capital regulation, risk-taking and monetary policy: A missing link in the transmission mechanism?," Journal of Financial Stability, Elsevier, vol. 8(4), pages 236-251.

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    More about this item

    Keywords

    Inflation risk premium; equity risk premium; term premium;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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