Risk Premia and the Real Effects of Money

Sebastian Di Tella

American Economic Review, 2020, vol. 110, issue 7, 1995-2040

Abstract: This paper proposes a flexible-price theory of the role of money in an economy with incomplete idiosyncratic risk sharing. When the risk premium goes up, money provides a safe store of value that prevents interest rates from falling, reducing investment. Investment is too high during booms when risk is low, and too low during slumps when risk is high. Monetary policy cannot correct this: money is superneutral and Ricardian equivalence holds. The optimal allocation requires the Friedman rule and a tax/subsidy on capital. The real effects of money survive even in the cashless limit.

JEL-codes: E32 E41 E43 E44 E52 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

Downloads: (external link)
https://www.aeaweb.org/doi/10.1257/aer.20180203 (application/pdf)
https://doi.org/10.3886/E117665V1 (text/html)
https://www.aeaweb.org/doi/10.1257/aer.20180203.appx (application/pdf)
https://www.aeaweb.org/doi/10.1257/aer.20180203.ds (application/zip)
Access to full text is restricted to AEA members and institutional subscribers.

Related works:
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: https://EconPapers.repec.org/RePEc:aea:aecrev:v:110:y:2020:i:7:p:1995-2040

Ordering information: This journal article can be ordered from
https://www.aeaweb.org/journals/subscriptions

DOI: 10.1257/aer.20180203

Access Statistics for this article

American Economic Review is currently edited by Esther Duflo

More articles in American Economic Review from American Economic Association Contact information at EDIRC.
Bibliographic data for series maintained by Michael P. Albert ().