Equity premium and monetary policy in a model with limited asset market participation

Roman Horvath, Lorant Kaszab and Aleš Maršál

Economic Modelling, 2021, vol. 95, issue C, 430-440

Abstract: We develop a dynamic stochastic general equilibrium model to examine how monetary policy shocks affect income inequality and the equity premium. The model features Ricardian and non-Ricardian households and shows that a monetary policy tightening causes an endogenous redistribution of income from non-Ricardians to Ricardians. Ricardians’ consumption comoves more strongly with asset returns, giving rise to high equity premia. We extend our model with several frictions and estimate it with generalized method of moments using US macroeconomic and financial data from 1960 to 2007. We find that the estimated model jointly matches the bond and equity premia. We complement our theoretical model with vector autoregression estimations and show that a tightening of US monetary policy increases equity premia.

Keywords: Limited participation; Monetary policy; DSGE; Equity premium (search for similar items in EconPapers)
JEL-codes: E32 E44 G12 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (4)

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Related works:
Working Paper: Equity Premium and Monetary Policy in a Model with Limited Asset Market Participation (2020)
Working Paper: Equity Premium and Monetary Policy in a Model with Limited Asset Market Participation (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:95:y:2021:i:c:p:430-440

DOI: 10.1016/j.econmod.2020.03.010

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