Monetary Policy Effects on Financial Risk Premia
22 Pages Posted: 9 Nov 2006 Last revised: 15 Jun 2013
Date Written: September 1, 2008
Abstract
The effect of monetary policy on financial risk premia is analysed in a simple general equilibrium model with sticky wages and an optimising central bank. Analytical results show that equity risk premia and term premia are higher under inflation targeting than under output targeting, and that inflation risk premia are higher for policies that strike a balance between output and inflation stability (and achieve a social optimum) than for policies that target only one of them.
Keywords: inflation risk premium, equity risk premium, term premium, announcement effects
JEL Classification: E52, E44, G12
Suggested Citation: Suggested Citation
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