Global financial cycles and risk premiums Alan M. Taylor , University of California-Davis Oscar Jorda , Federal Reserve Bank of San Francisco and University of California-Davis Mortiz Schularick , University of Bonn and CEPR Felix Ward , University of Bonn View Abstract

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A Risk-centric Model of Demand Recessions and Macroprudential Policy Ricardo Caballero , Massachusetts Institute of Technology Alp Simsek , Massachusetts Institute of Technology View Abstract

Download Preview (PDF, 1.09 MB) Abstract When investors are unwilling to hold the economy's risk, a decline in the interest rate increases the Sharpe ratio of the market and equilibrates the risk markets. If the interest rate is constrained from below, risk markets are instead equilibrated via a decline in asset prices. However, the latter drags down aggregate demand, which further drags prices down, and so on. If investors are pessimistic about the recovery, the economy becomes highly susceptible to downward spirals due to dynamic feedbacks between asset prices, aggregate demand, and growth. In this context, belief disagreements generate highly destabilizing speculation that motivates macroprudential policy.

Credit, Risk Appetite, and Monetary Policy Transmission David Aikman , Bank of England Andreas Lehnert , Federal Reserve Board Nellie Liang , Federal Reserve Board Michelle Modugno , Federal Reserve Board View Abstract

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Download Preview (PDF, 1.65 MB) Download PowerPoint (PDF, 1.80 MB) Abstract We show that the effects of financial conditions and monetary policy on U.S. economic performance depend nonlinearly on nonfinancial sector credit. When credit is below its trend, an impulse to financial conditions leads to improved economic performance and monetary policy transmission works as expected. By contrast, when credit is above trend, a similar impulse leads to an economic expansion in the near-term, but then a recession in later quarters. In addition, tighter monetary policy does not lead to tighter financial conditions when credit is above trend and is ineffective at slowing the economy, consistent with evidence of an attenuated transmission of policy changes to distant forward Treasury rates in high-credit periods. These results suggest that credit is an important conditioning variable for the effects of financial variables on macroeconomic performance.