Monetary Policy, Redistribution, and Risk Premia

72 Pages Posted: 17 Jan 2020 Last revised: 3 Jun 2021

See all articles by Rohan Kekre

Rohan Kekre

University of Chicago - Booth School of Business

Moritz Lenel

Princeton University - Bendheim Center for Finance

Multiple version iconThere are 2 versions of this paper

Date Written: May 24, 2021

Abstract

We study the transmission of monetary policy through risk premia in a heterogeneous agent New Keynesian environment. Heterogeneity in households’ marginal propensity to take risk (MPR) summarizes differences in portfolio choice on the margin. An unexpected reduction in the nominal interest rate redistributes to households with high MPRs, lowering risk premia and amplifying the stimulus to the real economy. Quantitatively, this mechanism rationalizes the role of news about future excess returns in driving the stock market response to monetary policy shocks and amplifies their real effects by 1.3-1.5 times.

Keywords: monetary policy, risk premia, heterogeneous agents

JEL Classification: E44, E63, G12

Suggested Citation

Kekre, Rohan and Lenel, Moritz, Monetary Policy, Redistribution, and Risk Premia (May 24, 2021). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2020-02, Available at SSRN: https://ssrn.com/abstract=3520925 or http://dx.doi.org/10.2139/ssrn.3520925

Rohan Kekre (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 South Woodlawn Avenue
Chicago, IL 60637
United States

Moritz Lenel

Princeton University - Bendheim Center for Finance ( email )

26 Prospect Avenue
Princeton, NJ 08540
United States

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