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Intermediated quantities and returns

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Author Info
Rajnish Mehra
Facundo Piguillem
Edward C. Prescott

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Abstract

The difference between average borrowing and lending rates in the United States is over 2 percent. In spite of this large difference, there is over 1.7 times GNP in 2007 of intermediated borrowing and lending between households. In this paper a model is developed consistent with these facts. The only difference within an age cohort is preferences for bequests. Individuals with little or no bequest motive are lenders, while individuals with strong bequest motive are borrowers and owners of productive capital. Given no aggregate uncertainty, the return on equity is the same as the household borrowing rate. The government can borrow at the household lending rate, so there is a 2 percent equity premium in our world with no aggregate uncertainty. We examine the distribution and life cycle patterns of asset holding and consumption and find there is large dispersion in asset holdings and little in consumption.

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Paper provided by Federal Reserve Bank of Minneapolis in its series Staff Report with number 405.

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Date of creation: 2008
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Handle: RePEc:fip:fedmsr:405

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Keywords: Equilibrium (Economics) ; Financial markets;

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