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IMF Economic Review

, Volume 67, Issue 1, pp 215–260 | Cite as

Global Price of Risk and Stabilization Policies

  • Tobias Adrian
  • Daniel Stackman
  • Erik VogtEmail author
Research Article
  • 32 Downloads

Abstract

We estimate a highly significant price of risk that forecasts global stock and bond returns as a nonlinear function of the VIX. We show that countries’ exposure to the global price of risk is related to macroeconomic risks as measured by output, credit, and inflation volatility, the magnitude of financial crises, and stock and bond market downside risk. Higher exposure to the global price of risk corresponds to both higher output volatility and higher output growth. We document that the transmission of the global price of risk to macroeconomic outcomes is mitigated by the magnitude of stabilization in the Taylor rule, the degree of countercyclicality of fiscal policy, and countries’ tendencies to employ prudential regulations. The estimated magnitudes are quantitatively important and significant, with large cross-sectional explanatory power. Our findings suggest that macroeconomic and financial stability policies should be considered jointly.

JEL Classification

G12 G17 G01 

Notes

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Copyright information

© International Monetary Fund 2019

Authors and Affiliations

  1. 1.International Monetary FundWashingtonUSA
  2. 2.NYU Stern School of BusinessNew YorkUSA
  3. 3.ChicagoUSA

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