Beschreibung:
This paper investigates the structural relationships between monetary policy and stockreturns. We build an asset pricing model incorporating a standard Taylor rule into aconsumption-CAPM framework. Our model quantitatively explains the negative riskpremium of expansionary monetary policy. As monetary policy plays a role of insurance,(expansionary) monetary policy beta is negatively related to covariances of returns withoutput gap and inflation theoretically and empirically. In addition, while systematicresponses mainly account for the negative risk premium, pure monetary policy shockshave little influence under plausible calibrations. We also provide theoretical predictionson how the slope of the Phillips curve and the response parameters of monetary policyaffect the cross-section of returns