Macro Risk Premium and Intermediary Balance Sheet Quantities
39 Pages Posted: 3 Feb 2010
Date Written: January 1, 2010
The macro risk premium measures the threshold return for real activity that receives funding from savers. We base our argument in this paper on the relationship between the macro risk premium and the growth of financial intermediaries’ balance sheets. The spare capacity of their balance sheets determines the intermediaries’ risk appetite, which in turn determines the real projects that receive funding and, hence, the supply of credit. Monetary policy affects risk appetite by changing the ability of intermediaries to leverage their capital. We estimate the time-varying risk appetite of financial intermediaries for the United States, Germany, the United Kingdom, and Japan, and study the joint dynamics of risk appetite using macroeconomic aggregates for the United States. We argue that risk appetite is an important indicator of monetary conditions.
Keywords: monetary policy, financial intermediation, capital markets
JEL Classification: E44, E52, G00
Suggested Citation: Suggested Citation