Global Price of Risk and Stabilization Policies

64 Pages Posted: 15 Jan 2019

See all articles by Tobias Adrian

Tobias Adrian

International Monetary Fund

Daniel Stackman

Federal Reserve Banks - Federal Reserve Bank of New York

Erik Vogt

Federal Reserve Bank of New York

Date Written: January 2019

Abstract

We estimate a highly significant price of risk that forecasts global stock and bond returns as a nonlinear function of the VIX. We show that countries' exposure to the global price of risk is related to macroeconomic risks as measured by output, credit, and inflation volatility, the magnitude of financial crises, and stock and bond market downside risk. Higher exposure to the global price of risk corresponds to both higher output volatility and higher output growth. We document that the transmission of the global price of risk to macroeconomic outcomes is mitigated by the magnitude of stabilization in the Taylor rule, the degree of countercyclicality of fiscal policy, and countries' tendencies to employ prudential regulations. The estimated magnitudes are quantitatively important and significant, with large cross sectional explanatory power. Our findings suggest that macroeconomic and financial stability policies should be considered jointly.

Keywords: Financial Stability, Fiscal policy, monetary policy, regulatory policy

JEL Classification: G01, G12, G17

Suggested Citation

Adrian, Tobias and Stackman, Daniel and Vogt, Erik, Global Price of Risk and Stabilization Policies (January 2019). CEPR Discussion Paper No. DP13435. Available at SSRN: https://ssrn.com/abstract=3315361

Tobias Adrian (Contact Author)

International Monetary Fund ( email )

Kuwait

Daniel Stackman

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

Erik Vogt

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

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