Citation

Discussion Paper Details

Please find the details for DP7727 in an easy to copy and paste format below:

Full Details | Bibliographic Reference

Full Details

Title: Monetary Policy and the Cyclicality of Risk

Author(s): Christopher Gust and J David L�pez-Salido

Publication Date: March 2010

Keyword(s): countercyclical equity premium, monetary policy, portfolio inertia and segmented markets

Programme Area(s): International Macroeconomics

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.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=7727

Bibliographic Reference

Gust, C and L�pez-Salido, J. 2010. 'Monetary Policy and the Cyclicality of Risk'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=7727