Monetary-Fiscal Policy Mix and Risks of Nominal Bonds

Department of Finance    2017-12-15

Monetary-Fiscal Policy Mix and Risks of Nominal Bonds

Speaker: Prof. Erica X.N. Li, Cheung Kong Graduate School of Business

Host: Shu Haibing, Assistant Professor from Department of Finance, ACEM

Time: Dec 20, 2017, 14:30-16:00

Venue: B1516 Antai College Building



We propose a New Keynesian model with monetary-fiscal policy regime switch to explain the time-varying correlation between returns on stock and nominal Treasury bond found in the data. In the active monetary and passive fiscal policy (AMPF) regime, neutral technology (NT) and marginal efficiency of investment (MEI) shocks are the most important drivers of economic fluctuations. In the passive monetary and active fiscal policy (PMAF) regime, the effect of the NT shock is depressed due to the weak reaction of interest rate to inflation, while the effect of the MEI shock remains strong. Because the NT shock leads to positive, while the MEI shock leads to negative correlation between returns on stock and nominal bond, our model thus provides a coherent explanation for the negative correlation between stock and bond returns during 1950s and 2000s when the fiscal policies are active, and for the positive correlation during 1980-2000 when monetary policies are active.


Speaker Introduction: 

Dr Erica X.N. Li is an Associate Professor of Finance at CKGSB. Dr Li holds a PhD in Finance with a minor in Macroeconomics from the University of Rochester and a PhD in Physics from the University of Massachusetts, Amherst. She also holds bachelor's degrees in Physics and Economics from Peking University.

Welcome to attend!