Intermediated quantities and returns

Rajnish Mehra (), Facundo Piguillem and Edward C. Prescott

No 405, Staff Report from Federal Reserve Bank of Minneapolis

Abstract: A large amount of intermediated borrowing and lending takes place between households. The average difference in these 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 results from differences in preferences for making bequests. In equilibrium, lenders are annuity holders and borrowers are equity holders. The borrowing rate and return on equity are the same in our model, which has no aggregate uncertainty. With intermediation costs, the lending rate is less than the borrowing rate and there is an equity premium. Within age cohorts, human capital endowments and inheritances are identical. As a result, there is almost no dispersion in consumption, yet there is a sizable dispersion in net worth and a huge dispersion in equity holdings.

Keywords: Equilibrium (Economics); Financial markets (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge
Date: Written 2008
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Related works:
Working Paper: Intermediated Quantities and Returns (2007)
Working Paper: Intermediated quantities and returns (2007)
Working Paper: Intermediated Quantities and Returns (2008)
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