Nominal Rigidities and Asset Pricing in New Keynesian Monetary Models

Abstract:     
The aim of this paper is to inspect the asset pricing properties of basic New Keynesian monetary models. Because of monetary nonneutrality, expected returns on assets must pay a risk premium not only on technology shocks, as in RBC models, but also on monetary shocks. We provide closed form solutions for risk premia and show how the equity premium depends on the type of nominal rigidity considered. In particular, a model with staggered wages is shown to perform better than a model with staggered prices in the sense of generating a higher equity premium than in the benchmark flexible equilibrium. The model also produces unconditional pricing implications to be tested empirically.

Number of Pages in PDF File: 39

Keywords: Asset pricing in production economies, nominal rigidities

JEL Classification: E44, G12

working papers series