Risk, Monetary Policy and Asset Prices in a Global World
78 Pages Posted: 15 May 2020 Last revised: 20 Mar 2021
Date Written: March 20, 2021
We study how monetary policy and risk shocks affect major asset prices (short-term interest rates, stocks, long-term bonds) in three large economies: the US, the euro area, and Japan. Using a high-frequency framework, we fail to find evidence in favor of monetary policy driving asset price cycles through a risk channel. Instead, there is a strong global common component in risk shocks which is not driven by monetary policy. Comparing the impact of monetary policy and risk shocks on asset prices across countries, monetary policy spillovers are economically relatively more (less) important for interest rates and bond prices (stock prices) than risk shocks. The US generates relatively important monetary policy spillovers, but information shocks emanating from the euro area produce relatively the strongest effects on international stock and bond markets. We provide suggestive evidence that monetary policy effects on asset prices may reflect a persistent interest rate rather than a risk premium effect.
Keywords: Risk, Uncertainty, Monetary policy, International spillovers, Global Financial Cycle, Stock returns, Bond returns, Interest rate
JEL Classification: E44, E52, G12, G20, E32
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