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Equity Premium and Monetary Policy in a Model with Limited Asset Market Participation

Author

Listed:
  • Roman Horvath

    (Charles University in Prague)

  • Lorant Kaszab

    (Magyar Nemzeti Bank (Central Bank of Hungary))

  • Ales Marsal

    (Vienna University of Economics and Business)

Abstract

We develop a dynamic stochastic general equilibrium model calibrated to US data to examine how monetary policy shocks affect income inequality and the equity premium. The model features Ricardian and non-Ricardian households and shows that a monetary policy tightening causes an endogenous redistribution of income from non-Ricardians to Ricardians. Ricardians' consumption comoves more strongly with asset returns, giving rise to high equity premia. We extend our model with several frictions and estimate it with generalized method of moments using US macroeconomic and financial data from 1960-2007. We find that the estimated model jointly matches the bond and equity premia. We complement our theoretical model with vector autoregression estimations and show that a tightening of US monetary policy increases equity premia.

Suggested Citation

  • Roman Horvath & Lorant Kaszab & Ales Marsal, 2020. "Equity Premium and Monetary Policy in a Model with Limited Asset Market Participation," MNB Working Papers 2020/3, Magyar Nemzeti Bank (Central Bank of Hungary).
    • Handle: RePEc:mnb:wpaper:2020/3
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    References listed on IDEAS

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    2. Elminejad, Ali & Havranek, Tomas & Irsova, Zuzana, 2022. "Relative Risk Aversion: A Meta-Analysis," MetaArXiv b8uhe, Center for Open Science.

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    More about this item

    Keywords

    Limited Asset Market Participation; Monetary Policy; DSGE; Equity Premium;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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