Risk, Uncertainty and Monetary Policy in a Global World

Abstract

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, since the turn of the century. Examining the impact of monetary policy on risk, monetary policy does not drive asset price cycles through a risk channel. Instead, we find 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 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 the strongest effects on international stock and bond markets. We provide suggestive evidence that monetary policy effects on asset prices reflect a persistent interest rate rather than a risk premium effect.