Monetary policy and the cyclicality of risk

Christopher Gust and David Lopez-Salido

No 999, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We use a DSGE model that generates endogenous movements in risk premia to examine the positive and normative implications of alternative monetary policy rules. As emphasized by the microfinance literature, variation in risk arises because households face fixed costs of transferring cash across financial accounts, implying that some households rebalance their portfolios infrequently. We show that the model can account for the mean returns on equity and the risk-free rate, and in line with empirical evidence generates a decline in the equity premium following an unanticipated easing of monetary policy. An important result that emerges from our analysis is that countercyclical monetary policy generates higher average welfare than constant money growth or zero inflation policies.

Keywords: Monetary; policy (search for similar items in EconPapers)
Date: 2010
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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Related works:
Journal Article: Monetary policy and the cyclicality of risk (2014)
Working Paper: Monetary Policy and the Cyclicality of Risk (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:999

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