Risk premium shifts and monetary policy: a coordination approach
Our understanding of crisis propagation and the telling of the crisis narrative have been heavily influenced by the events surrounding the 2008 crisis which has focused on the leverage of banks and other financial intermediaries. Since then the focus has shifted from banks to financial market liquidity in line with the shift in the pattern of financial intermediation as global banks have increasingly given way to long-term investors operating in the bond market. Long-term investors are often portrayed as a stabilizing influence in financial markets absorbing losses without insolvency and cushioning market shocks caused by leveraged players. However recent episodes such as the so-called taper tantrum of 2013 have shown that even long-term investors may have limited appetite for losses and that they will join in a selling spree when one arrives. The issue of evaporating market liquidity and one-sided markets in the face of concerted selling by investors has occupied an important place in recent policy discussions.