Monetary Policy and Wealth Effects: The Role of Risk and Heterogeneity
CESifo, Munich, 2024
CESifo Working Paper No. 11049
We study the role of asset revaluation in the monetary transmission mechanism. We build an analytical heterogeneous-agents model with two main ingredients: i) rare disasters; ii) heterogeneous beliefs. The model captures time-varying risk premia and precautionary savings in a setting that nests the textbook New Keynesian model. The model generates large movements in asset prices after a monetary shock but these movements can be neutral on real variables. Real effects depend on the redistribution among agents with heterogeneous precautionary motives. In a calibrated exercise, we find that this channel accounts for the majority of the transmission to output.
Fiscal Policy, Macroeconomics and Growth
Monetary Policy and International Finance