The Finance Brown Bag Seminar is held by the Institute for Finance, Banking and Insurance (WU Vienna) and the Vienna Graduate School of Finance (VGSF). It serves as a presentation platform for PhD students, faculty members, and visitors. An overview of BBS on the website of the Institute for Finance, Banking and Insurance.
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Andreas Schrimpf, Bank for International Settlements
Risk Appetite and Monetary Transmission
with Michael Bauer (Federal Reserve Bank of San Francisco), Maik Schmeling (Goethe University Frankfurt)
We construct a new high-frequency measure of changes in risk appetite around Federal Open Market Committee (FOMC) meetings. Fed policy actions and communication have substantial effects on risk appetite, consistent with the literature on the risk-taking channel of monetary policy. Most of the variation in asset prices and risk appetite is unexplained by conventional interest-rate surprises, which points to an important role of risk appetite in monetary transmission. Proxy SVARs with two separately-instrumented monetary policy shocks—a risk-free rate shock and a risk appetite shock—show the empirical importance of this channel. Risk appetite shocks have large, significant, and theory-consistent effects on inflation, output and employment. By contrast, the effects of risk-free rate shocks become insignificant or switch signs as soon as a risk-appetite shock is included in the VAR setup. Our evidence suggests that monetary transmission works primarily through risk asset prices and risk appetite. Standard estimation of monetary transmission based solely on interest-rate surprises misses most of these effects for two main reasons: First, the impact of interest-rate policy on asset prices is time-varying and state-dependent. Second, central bank communication can affect risk appetite and asset prices in ways that go beyond changes in the expected policy path.
