Asset pricing implications of a New Keynesian model

Bianca De Paoli (), Alasdair Scott and Olaf Weeken

Bank of England working papers from Bank of England

Abstract: To match the stylised facts of goods and labour markets, the canonical New Keynesian model augments the optimising neoclassical growth model with nominal and real rigidities. We ask what the implications of this type of model are for asset prices. Using a second-order approximation, we examine bond and equity returns, the equity risk premium, and the behaviour of the real and nominal term structure. We catalogue the factors that are most important for determining the size of risk premia and the slope and level of the yield curve. In a world of technology shocks only, increasing the degree of real rigidities raises risk premia and increasing nominal rigidities reduces risk premia. In a world of monetary policy shocks only, both real and nominal rigidities raise risk premia. The results indicate that the implications of the New Keynesian model for average asset returns depend critically on the characterisation of shocks hitting the model economy.

View list of references

Downloads: (external link)
http://www.bankofengland.co.uk/publications/workingpapers/wp326.pdf (application/pdf)

Related works:
Working Paper: Asset pricing implications for a New Keynesian model (2007)
Working Paper: Asset pricing implications of a New Keynesian model (2006)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:boe:boeewp:326

Access Statistics for this paper

More papers in Bank of England working papers from Bank of England
Address: Publications Group Bank of England Threadneedle Street London EC2R 8AH
Contact information at EDIRC.
Series data maintained by Publications Group ().