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Intermediated Quantities and Returns

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  • Rajnish Mehra
  • Edwarad C Prescott
  • Facundo Piguillem

Abstract

There is a large amount of intermediated borrowing and lending between households. Some of it is intergenerational, but most is between older households. The average difference in borrowing and lending rates is over 2 percent. In this paper, we develop a model economy that displays these facts and matches not only the returns on assets but also their quantities. The heterogeneity giving rise to borrowing and lending and differences in equity holdings depends on differences in the strength of the bequest motive. In equilibrium, the lenders are annuity holders and the borrowers are those who have equity holdings, who live off its income when retired, and who leave a bequest. The borrowing rate and return on equity are the same in the absence of aggregate uncertainty. The divergence between borrowing and lending rates can thus give rise to an equity premium, even in a world without aggregate uncertainty. ; Updated by Working Paper 685.

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Paper provided by UCLA Department of Economics in its series Levine's Bibliography with number 122247000000001580.

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Date of creation: 01 Oct 2007
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Handle: RePEc:cla:levrem:122247000000001580

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Cited by:
  1. Dreyer, Johannes K. & Schneider, Johannes & Smith, William T., 2013. "Saving-based asset-pricing," Journal of Banking & Finance, Elsevier, Elsevier, vol. 37(9), pages 3704-3715.
  2. Jeremy Greenwood & Juan M. Sanchez & Cheng Wang, 2010. "Quantifying the impact of financial development on economic development," Working Paper, Federal Reserve Bank of Richmond 10-05, Federal Reserve Bank of Richmond.
  3. Cúrdia, Vasco & Woodford, Michael, 2009. "Conventional and Unconventional Monetary Policy," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7514, C.E.P.R. Discussion Papers.
  4. Vasco Cúrdia & Michael Woodford, 2010. "The central-bank balance sheet as an instrument of monetary policy," Staff Reports, Federal Reserve Bank of New York 463, Federal Reserve Bank of New York.
  5. Paul De Grauwe & Corrado Macchiarelli, 2013. "Animal Spirits and Credit Cycles," CESifo Working Paper Series 4480, CESifo Group Munich.

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