Redistribution, Risk Premia, and the Macroeconomy

More on Moritz Lenel

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*joint work with Rohan Kekre (Chicago Booth).

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 explore the role of this mechanism for the transmission of conventional monetary policy.  An unexpected reduction in the nominal interest rate redistributes to agents with high MPRs.  Unlike in models with a representative agent or heterogeneity in MPCs alone, this can jointly rationalize the risk premium and investment responses to monetary policy shocks.