Assessing the Effects of Unconventional Monetary Policy and Low Interest Rates on Pension Fund Risk Incentives
Journal of Banking and Finance, Vol. 77, pp. 35-52, April 2017
59 Pages Posted: 15 Mar 2015 Last revised: 15 Jan 2017
Date Written: January 14, 2017
This study quantifies the effects of persistently low interest rates near to the zero lower bound and the unconventional monetary policy on pension fund risk incentives in the United States. Using two structural vector autoregressive (VAR) models and a counterfactual scenario analysis, the results show that monetary policy shocks, as identified by changes in Treasury yields following changes in the central bank’s target interest rates, lead to a substantial increase in pension funds’ allocation to equity assets. Notably, the shift from bonds to equity securities is greater during the period where the US Federal Reserve conducted unconventional monetary policy measures. Additional findings show a positive correlation between pension fund risk-taking, low interest rates and the decline in Treasury yields across both well-funded and underfunded public pension plans, which is thus consistent with a structural risk-shifting incentive.
Keywords: Pension funds; Unconventional monetary policy; Asset allocation; Interest rates
JEL Classification: G23, E52, G11
Suggested Citation: Suggested Citation