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

Söderlind, Paul, Monetary Policy Effects on Financial Risk Premia (September 1, 2008). The Manchester School, Vol. 76, pp. 690-707, 2008, U. of St. Gallen Law & Economics Working Paper No. 2006-26, Available at SSRN: https://ssrn.com/abstract=943636

Paul Söderlind (Contact Author)

University of St. Gallen ( email )

Rosenbergstrasse 52
St. Gallen, 9000
Switzerland
+41 71 224 7064 (Phone)
+41 71 224 7088 (Fax)

HOME PAGE: http://https://sites.google.com/site/paulsoderlindecon/home

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