Monetary Policy and Wealth Effects: The Role of Risk and Heterogeneity
Nicolas Caramp and
Dejanir H. Silva
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Dejanir H. Silva: Department of Economics, University of California Davis
No 341, Working Papers from University of California, Davis, Department of Economics
Abstract:
We study the role of wealth effects, i.e. the revaluation of stocks, bonds, and human wealth, in the monetary policy transmission mechanism. The analysis of wealth effects requires to incorporate realistic asset-pricing dynamics and heterogeneous households’ portfolios. Thus, we build an analytical heterogeneous-agents model with two main ingredients: i) rare disasters and ii) positive private debt. The model captures time-varying risk premia and precautionary savings in a linearized setting that nests the textbook New Keynesian model. Quantitatively, the model matches the empirical response of asset prices as well as the heterogeneous impact on borrowers and savers. We find that wealth effects induced by time-varying risk and private debt account for the bulk of the output response to monetary policy.
Keywords: Monetary Policy; Wealth Effects; Asset Prices; Heterogeneity (search for similar items in EconPapers)
JEL-codes: E21 E44 E52 (search for similar items in EconPapers)
Pages: 64
Date: 2021-07-15
New Economics Papers: this item is included in nep-dge, nep-mac, nep-mon and nep-ore
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Citations: View citations in EconPapers (3)
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Persistent link: https://EconPapers.repec.org/RePEc:cda:wpaper:341
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