Risk Appetite and the Risk-Taking Channel of Monetary Policy

Michael Bauer, Ben Bernanke and Eric Milstein

Journal of Economic Perspectives, 2023, vol. 37, issue 1, 77-100

Abstract: Monetary policy affects financial markets and the broader economy in part by changing the risk appetite of investors. This article provides new evidence for this so-called risk-taking channel of monetary policy by revisiting and extending event-study analysis of Federal Open Market Committee announcements. We document significant effects of unexpected monetary policy changes on risk indicators drawn from equity, fixed-income, credit, and foreign exchange markets. We develop a new index of risk appetite based on the common component of these indicators. Surprise monetary easing leads to strong and persistent increases in our index, and vice versa for tightening surprises, consistent with the view that monetary policy affects asset prices in large part through its effects on risk appetite. We discuss the implications of the risk-taking channel for monetary policy transmission, optimal monetary policy, and financial stability.

JEL-codes: E23 E44 E52 F31 G12 G14 G21 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (19)

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DOI: 10.1257/jep.37.1.77

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