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Monetary Policy, Redistribution, and Risk Premia

Author

Listed:
  • Rohan Kekre

    (University of Chicago - Booth School of Business)

  • Moritz Lenel

    (Princeton University - Bendheim Center for Finance)

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.

Suggested Citation

  • Rohan Kekre & Moritz Lenel, 2020. "Monetary Policy, Redistribution, and Risk Premia," Working Papers 2020-02, Becker Friedman Institute for Research In Economics.
    • Handle: RePEc:bfi:wpaper:2020-02
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    Keywords

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    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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