A Model of Monetary Policy and Risk Premia

Itamar Drechsler, Alexi Savov and Philipp Schnabl

No 20141, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: E52 E58 G12 G21 (search for similar items in EconPapers)
Date: 2014-05
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-mac and nep-mon
Note: AP ME
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Citations: View citations in EconPapers (36)

Published as ITAMAR DRECHSLER & ALEXI SAVOV & PHILIPP SCHNABL, 2018. "A Model of Monetary Policy and Risk Premia," The Journal of Finance, vol 73(1), pages 317-373.

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