A further risk compensated by the risk premium derives from the expected volatility of an asset price during its lifespan. As monetary policy affects asset prices, it can also impact the expected volatility of asset prices and, in turn, again affect the risk premium. The link between the monetary policy instrument and any one financial market price is subtle and variable. Central banks would face an exceedingly difficult task if they had to rely on a single price to transmit monetary policy impulses to the real economy. The fact that monetary policy works simultaneously through several financial market prices reinforces the precision and the impact of monetary policy. So far, I have tried to outline how monetary policy impulses are transmitted to financial markets. The monetary policy instrument itself, typically a short-term interest rate, has only a limited impact on the real economy. Monetary policy works through its aggregate impact on financial markets. Monetary policy impacts financial markets mainly through expectations. Indeed, Michael Woodford (2004, p.16) argues that "for not only do expectations about policy matter, but, at least under current conditions, very little else matters". Expectations influence financial markets in two ways: first, directly via the yield curve, i.e. through expectations about the future evolution of the monetary policy instrument, and second, indirectly, via the expected effect of monetary policy on the real economy, which then feeds back to financial market prices. In practice, it is difficult to distinguish between direct and indirect effects.
In addition, monetary policy can affect some commodities to the extent that their prices may reflect a change in inflation expectations. Last, but not least, monetary policy affects housing prices. In general, the transmission from monetary policy to housing prices tends to be stickier than is the case for other financial market prices. This is because real estate is not a standardised good which is traded on organised markets. Nonetheless, at least in theory, the transmission from monetary policy to housing prices is relatively straightforward:  2  See Rich (2000) for an overview of the SNB's experience in monetary targeting since 1974 and the reasons for the transition to a new strategy in 2000. 2  BIS Review 30/2006  Real estate, like a long-dated bond, has a very long maturity, as the yield it returns, namely housing, will accumulate for several decades. Monetary policy affects the discount rate which must be used to discount future yields. Apart from that, the medium-term real effects of monetary policy may affect demand, rental prices and thus house prices. An important determinant for the price of all long-dated assets is the risk premium. One of the risks compensated for by the risk premium is purchasing power risk, i.e. the risk arising from the uncertain purchasing power of future expected proceeds from an asset. Since it is monetary policy which ultimately determines the purchasing power of money, monetary policy affects the perceived purchasing power risk.