Working Paper

On the Structural Interpretation of the Smets-Wouters “Risk Premium” Shock

Abstract: This article shows that the \"risk premium\" shock in Smets and Wouters (2007) can be interpreted as a structural shock to the demand for safe and liquid assets such as short-term US Treasury securities. Several implications of this interpretation are discussed.

Keywords: Smets-Wouters model; safe and liquid assets; money demand; risk premiums; shock; New Keynesian model; DSGE; flight-to-quality; liquidity preference;

JEL Classification: E00; E1; E3; E4; E5; G1;

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Bibliographic Information

Provider: Federal Reserve Bank of Chicago

Part of Series: Working Paper Series

Publication Date: 2014-10-22

Number: WP-2014-8

Pages: 15 pages