Risk aversion, uncertainty, and monetary policy in zero lower bound environments

- We study the interaction between risk aversion, uncertainty, and monetary policy.
- We apply shadow short rates (SRs) as a monetary policy measure in ZLB Environments.
- We show the results of Bekaert et al. (2013) persist even in the ZLB period.
- Our findings suggest the SRs are good proxies for unconventional monetary policy.

Bekaert et al. (2013) show that a lax monetary policy decreases both risk aversion and uncertainty, and that shocks to risk aversion and uncertainty induce changes in monetary policy. We extend their analysis for the pre-crisis period to the post-crisis period by using a “shadow short rate” as a proxy for unconventional monetary policies in zero lower bound environments. We find that the empirical link between monetary policy, risk aversion, and uncertainty found in Bekaert et al. (2013) persists even in the post-crisis period, but the link is uncovered only when the shadow short rates are used to measure the monetary policy stance.