Monetary policy and the cyclicality of risk

Christopher Gust and David Lopez-Salido

Journal of Monetary Economics, 2014, vol. 62, issue C, 59-75

Abstract: A dynamic general equilibrium model to study the relationship between monetary policy and movements in risk is developed. Variation in risk arises because households face fixed costs of transferring cash across financial accounts, implying that some households rebalance their portfolios infrequently. Accordingly, prices for risky assets respond sharply to aggregate shocks because only a relatively small subset of consumers are available to absorb these shocks. The model can account for both the mean and the volatility of returns on equity and the risk-free rate and generates a decline in the equity premium following an unanticipated easing of monetary policy.

Keywords: Segmented markets; Equity premium; Monetary policy rules (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0304393213001578
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Monetary Policy and the Cyclicality of Risk (2010)
Working Paper: Monetary policy and the cyclicality of risk (2010)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:62:y:2014:i:c:p:59-75

DOI: 10.1016/j.jmoneco.2013.11.008

Access Statistics for this article

Journal of Monetary Economics is currently edited by R. G. King and C. I. Plosser

More articles in Journal of Monetary Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().