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Nominal rigidities, asset returns, and monetary policy

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  • Li, Erica X.N.
  • Palomino, Francisco

Abstract

Asset-return implications of nominal price and wage rigidities are analyzed in general equilibrium. Nominal rigidities, combined with permanent productivity shocks, increase expected excess returns on production claims. This is mainly explained by consumption dynamics driven by rigidity-induced changes in employment and markups. An interest-rate monetary policy rule affects asset returns. Stronger (weaker) rule responses to inflation (output) increase expected excess returns. Policy shocks substantially increase asset-return volatility. Price rigidity heterogeneity produces cross-sectoral differences in expected returns. The model matches important macroeconomic moments and the Sharpe ratio of stock returns, but only captures a small fraction of the observed equity premium.

Suggested Citation

  • Li, Erica X.N. & Palomino, Francisco, 2014. "Nominal rigidities, asset returns, and monetary policy," Journal of Monetary Economics, Elsevier, vol. 66(C), pages 210-225.
    • Handle: RePEc:eee:moneco:v:66:y:2014:i:c:p:210-225
    DOI: 10.1016/j.jmoneco.2014.05.004
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