Asset price channel and financial markets

The asset price channel focuses on the relative prices of a wide range of assets in the transmission of monetary impulses on the financial and real capital markets. If monetary impulses are already fading on the financial markets, then their effectiveness in terms of economic policy targets has to be questioned. A missing tendency towards a long-run equilibrium relationship in the observable yield rates on the financial markets is often attributed to non-stationary risk premiums underlying the financial assets. In this paper a cointegration model for the risk-adjusted yields of the money market, market for bank credit and the bonds market is developed for the monetary policy regime of a money supply target in the Federal Republic of Germany for the period 1980-1998. Furthermore, it is also shown that on the basis of the transmission model we consider, the stock market does not integrate consistently into the cointegration system of the other of the financial markets.