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Monetary Policy, Redistribution, and Risk Premia

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  • 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.

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  • Rohan Kekre & Moritz Lenel, 2022. "Monetary Policy, Redistribution, and Risk Premia," Econometrica, Econometric Society, vol. 90(5), pages 2249-2282, September.
    • Handle: RePEc:wly:emetrp:v:90:y:2022:i:5:p:2249-2282
    DOI: 10.3982/ECTA18014
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