IMF Working Papers

The Insurer Channel of Monetary Policy

By Divya Kirti, Akshat V. Singh

March 14, 2025

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Format: Chicago

Divya Kirti, and Akshat V. Singh "The Insurer Channel of Monetary Policy", IMF Working Papers 2025, 054 (2025), accessed April 22, 2025, https://doi.org/10.5089/9798229003667.001

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

We study the role of life insurers in the transmission of US monetary policy. Insurers have uniquely long-term liabilities. We posit that they face a trade-off between matching liability duration exposure by investing in long-term government debt and earning higher yields by shifting to risky—but shorter-term—private debt. We show that, due to this tradeoff, long-term risk free rates play a critical role in shaping insurers' demand for risky private debt. Contractionary monetary policy shocks that raise long-term risk-free rates reduce insurers' demand for private debt, raising risk premia. We use granular, high frequency data and regulatory changes to trace how insurers' investment behavior transmits monetary policy shocks to risk premia.

Subject: Bonds, Corporate bonds, Financial institutions, Financial markets, Financial services, Insurance companies, Securities markets, Yield curve

Keywords: Bonds, Corporate bonds, Global, IMF working paper No. 25/54, Insurance companies, Insurer Channel, Life insurance, Life insurer, Monetary policy, Monetary policy shock, NBFIs, Risk premia, Securities markets, Yield curve

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