Liquidity, Risk Premia, and the Financial Transmission of Monetary Policy

Itamar Drechsler (), Alexi Savov () and Philipp Schnabl
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Itamar Drechsler: The Wharton School, University of Pennsylvania, Philadelphia, PA 19104-6297, USA
Alexi Savov: Stern School of Business, New York University, New York, NY 10012, USA

Annual Review of Financial Economics, 2018, vol. 10, issue 1, 309-328

Abstract: In recent years, there has been a resurgence of research on the transmission of monetary policy through the financial system, fueled in part by empirical findings showing that monetary policy affects asset prices and the financial system in ways not explained by the New Keynesian paradigm. In particular, monetary policy appears to impact risk premia in stock and bond prices and to effectively control the liquidity premium in the economy (the cost of holding liquid assets). We review these findings and recent theories proposed to explain them, and we outline a conceptual framework that unifies them. The framework revolves around the central role of liquidity in risk sharing and explains how monetary policy governs its production and use within the financial sector.

Keywords: monetary policy; financial institutions; deposits channel; risk premia; liquidity premium; maturity transformation (search for similar items in EconPapers)
JEL-codes: E52 G12 G21 (search for similar items in EconPapers)
Date: 2018
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