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Discussion Paper Details

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Title: Global Price of Risk and Stabilization Policies

Author(s): Tobias Adrian, Daniel Stackman and Erik Vogt

Publication Date: January 2019

Keyword(s): Financial Stability, Fiscal policy, monetary policy and regulatory policy

Programme Area(s): Financial Economics

Abstract: We estimate a highly significant price of risk that forecasts global stock and bond returns as a nonlinear function of the VIX. We show that countries' exposure to the global price of risk is related to macroeconomic risks as measured by output, credit, and inflation volatility, the magnitude of financial crises, and stock and bond market downside risk. Higher exposure to the global price of risk corresponds to both higher output volatility and higher output growth. We document that the transmission of the global price of risk to macroeconomic outcomes is mitigated by the magnitude of stabilization in the Taylor rule, the degree of countercyclicality of fiscal policy, and countries' tendencies to employ prudential regulations. The estimated magnitudes are quantitatively important and significant, with large cross sectional explanatory power. Our findings suggest that macroeconomic and financial stability policies should be considered jointly.

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Bibliographic Reference

Adrian, T, Stackman, D and Vogt, E. 2019. 'Global Price of Risk and Stabilization Policies'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=13435