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  5. Risk Appetite and the Risk-Taking Channel of Monetary Policy

Journal of Economic Perspectives

ISSN 0895-3309 (Print) | ISSN 1944-7965 (Online)

Risk Appetite and the Risk-Taking Channel of Monetary Policy

  • Michael D. Bauer
  • Ben S. Bernanke
  • Eric Milstein
Journal of Economic Perspectives
vol. 37, no. 1, Winter 2023
(pp. 77–100)
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Abstract

Monetary policy affects financial markets and the broader economy in part by changing the risk appetite of investors. This article provides new evidence for this so-called risk-taking channel of monetary policy by revisiting and extending event-study analysis of Federal Open Market Committee announcements. We document significant effects of unexpected monetary policy changes on risk indicators drawn from equity, fixed-income, credit, and foreign exchange markets. We develop a new index of risk appetite based on the common component of these indicators. Surprise monetary easing leads to strong and persistent increases in our index, and vice versa for tightening surprises, consistent with the view that monetary policy affects asset prices in large part through its effects on risk appetite. We discuss the implications of the risk-taking channel for monetary policy transmission, optimal monetary policy, and financial stability.

Citation

Bauer, Michael D., Ben S. Bernanke, and Eric Milstein. 2023. "Risk Appetite and the Risk-Taking Channel of Monetary Policy." Journal of Economic Perspectives, 37 (1): 77–100. DOI: 10.1257/jep.37.1.77

Additional Materials

JEL Classification

  • E23 Macroeconomics: Production
  • E44 Financial Markets and the Macroeconomy
  • E52 Monetary Policy
  • F31 Foreign Exchange
  • G12 Asset Pricing; Trading Volume; Bond Interest Rates
  • G14 Information and Market Efficiency; Event Studies; Insider Trading
  • G21 Banks; Depository Institutions; Micro Finance Institutions; Mortgages
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