Limited Participation in Equity Markets and Business Cycles

Juan Morelli

No 2021-026, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: This paper studies how the rise in US households' participation in equity markets affects the transmission of macroeconomic shocks to the economy. I embed limited participation into a New Keynesian framework for the US economy to analyze the individual and aggregate effects of higher participation. I derive three main results. First, participants are relatively more responsive to shocks than nonparticipants. Second, higher participation reduces the effectiveness of monetary policy. Third, with higher participation the economy becomes less volatile. I contrast key predictions of my model with new micro-level empirical evidence on the response of consumption to monetary policy shocks.

Keywords: Limited Participation; Monetary Policy; Stock Market; Investment; Business Cycle (search for similar items in EconPapers)
JEL-codes: E22 E32 E44 G51 (search for similar items in EconPapers)
Pages: 79 p.
Date: 2021
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2021-26

DOI: 10.17016/FEDS.2021.026

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