A key problem for monetary policy: Some risk premia rise when risk-free interest rates fall

If risk premia, which come on top of returns on risky assets, rise when risk-free interest rates fall, expansionary monetary policy becomes ineffective because it does not reduce the cost of financing the economy. In the United States and the euro zone, this has happened: For equities, especially in Europe; For return on corporate capital or equity; For real estate; But not for credit or corporate bonds. This means that the expansionary monetary policies: Have supported public and private sector borrowing; But have not supported equity markets (especially in Europe), housing investment or corporate investment as much as they should have. We understand that economic uncertainty may lead to both more expansionary monetary policies and higher risk premia.