Working Paper: CEPR ID: DP18229
Authors: Geert Bekaert; Marie Hoerova; Nancy Xu
Abstract: We study how monetary policy and risk shocks affect asset prices in the US, the euro area, and Japan since the turn of the century. We differentiate between “traditional” monetary policy and communication events, each decomposed into “pure” and information shocks. Communication shocks from the US spill over to risk in the euro area and vice versa. Both monetary policy and communication shocks spill over to stocks, with euro area information spillovers being particularly strong. US spillovers are consistent with global CAPM intuition whereas euro area spillovers are larger. Importantly, we document a strong global component of risk shocks which is not driven by monetary policy.
Keywords: risk; monetary policy; international spillovers; global financial cycle; trilemma; stock returns; interest rate; central bank communications
JEL Codes: E44; E52; G12; G20; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Traditional monetary policy in the US (E52) | domestic risk (F52) |
| Communication shocks (L96) | risk (D81) |
| Communication shocks (US) (L96) | risk (Euro area) (F36) |
| Communication shocks (Euro area) (F36) | risk (US) (D81) |
| Euro area traditional monetary policy (E52) | US risk (F59) |
| US monetary policy (E52) | domestic stock returns (G12) |
| Euro area monetary policy (E52) | domestic stock returns (G12) |
| Risk shocks orthogonal to monetary policy and communication (E49) | stock prices (G12) |
| Spillover effects from Euro area to US (F44) | stock prices (G12) |
| Pure monetary policy information shocks (E39) | stock returns (G12) |