MONETARY POLICY EFFECTS ON FINANCIAL RISK PREMIA

Paul Söderlind

Manchester School, 2008, vol. 76, issue 6, pages 690-707

Abstract: The effect of monetary policy on financial risk premia is analysed in a simple general equilibrium model with sticky wages and an optimizing 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. Copyright © 2008 The Author. Journal compilation © 2008 Blackwell Publishing Ltd and The University of Manchester.

Date: 2008

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