Working Paper: NBER ID: w28869
Authors: Rohan Kekre; Moritz Lenel
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 1.3-1.4 times.
Keywords: No keywords provided
JEL Codes: E44; E52; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Nominal interest rate (shock) (E43) | Wealth redistribution (D31) |
| Wealth redistribution (D31) | Risk premium on capital (G19) |
| Nominal interest rate (shock) (E43) | Risk premium on capital (G19) |
| Wealth redistribution (D31) | Investment (G31) |
| Wealth redistribution (D31) | Consumption (E21) |
| Wealth redistribution (D31) | Overall output (E23) |
| Risk premium on capital (G19) | Investment (G31) |
| Risk premium on capital (G19) | Consumption (E21) |
| Risk premium on capital (G19) | Overall output (E23) |