Monetary Policy, Redistribution, and Risk Premia
72 Pages Posted: 17 Jan 2020 Last revised: 5 May 2022
Date Written: May 2, 2022
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 1.3-1.4 times.
Keywords: monetary policy, risk premia, heterogeneous agents
JEL Classification: E44, E63, G12
Suggested Citation: Suggested Citation