Monetary Policy and Wealth Effects: The Role of Risk and Heterogeneity
CESifo, Munich, 2024
CESifo Working Paper No. 11049
![](https://cesifo.org/DocImg/cesifo1_wp11049.jpg?c=1712946293)
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