Risk Premium Shifts and Monetary Policy: A Coordination Approach

25 Pages Posted: 14 Jan 2016

See all articles by Stephen Morris

Stephen Morris

MIT

Hyun Song Shin

Bank for International Settlements (BIS)

Date Written: December 29, 2015

Abstract

We explore a global game model of the impact of monetary policy shocks. Risk-neutral asset managers interact with risk-averse households in a market with a risky bond and a floating rate money market fund. Asset managers are averse to coming last in the ranking of short-term performance. This friction injects a coordination element in asset managers’ portfolio choice that leads to large jumps in risk premiums in response to small future anticipated changes in central bank policy rates. The size of the asset management sector is the key parameter determining the extent of market disruption to monetary policy shocks.

Keywords: market liquidity, risk-taking channel, runs

JEL Classification: E43, E52, E58

Suggested Citation

Morris, Stephen Edward and Shin, Hyun Song, Risk Premium Shifts and Monetary Policy: A Coordination Approach (December 29, 2015). Princeton University William S. Dietrich II Economic Theory Center Research Paper No. 075_2016. Available at SSRN: https://ssrn.com/abstract=2712879 or http://dx.doi.org/10.2139/ssrn.2712879

Stephen Edward Morris (Contact Author)

MIT ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

HOME PAGE: http://https://economics.mit.edu/faculty/semorris

Hyun Song Shin

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

HOME PAGE: http://www.bis.org/author/hyun_song_shin.htm

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