Redistribution, Risk Premia, and the Macroeconomy joint with Rohan Kekre

Abstract:

We study the effects of redistribution on risk premia and investment in a heterogeneous agent New Keynesian environment.  Heterogeneity in agents' marginal propensity to take risk (MPR) summarizes differences in risk aversion, constraints, rules of thumb, and background risk relevant for portfolio choice on the margin.  Shocks which redistribute to agents with high MPRs reduce risk premia and, absent a monetary policy tightening, raise investment.  We quantitatively evaluate the role of this mechanism for the transmission of conventional monetary policy in the U.S. economy.  An unexpected reduction in the nominal interest rate redistributes to agents with high MPRs and lowers the risk premium.  This rationalizes the relative roles of dividend growth, risk-free rates, and excess returns in generating an increase in the stock market and contributes substantially to the transmission of monetary policy through investment.