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Monetary Policy and Wealth Effects: The Role of Risk and Heterogeneity

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  • Nicolas Caramp
  • Dejanir H. Silva

Abstract

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.

Suggested Citation

  • Nicolas Caramp & Dejanir H. Silva, 2024. "Monetary Policy and Wealth Effects: The Role of Risk and Heterogeneity," CESifo Working Paper Series 11049, CESifo.
    • Handle: RePEc:ces:ceswps:_11049
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    File URL: https://www.cesifo.org/DocDL/cesifo1_wp11049.pdf
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    References listed on IDEAS

    as
    1. Yves Achdou & Jiequn Han & Jean-Michel Lasry & Pierre-Louis Lions & Benjamin Moll, 2017. "Income and Wealth Distribution in Macroeconomics: A Continuous-Time Approach," NBER Working Papers 23732, National Bureau of Economic Research, Inc.
    2. Christiano, Lawrence J. & Eichenbaum, Martin & Evans, Charles L., 1999. "Monetary policy shocks: What have we learned and to what end?," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 2, pages 65-148, Elsevier.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    monetary policy; wealth effects; asset prices; aggregate risk; heterogeneity beliefs;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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