Nominal rigidities, asset returns, and monetary policy

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Date: Sept. 2014
Publisher: Elsevier B.V.
Document Type: Article
Length: 187 words

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Abstract :

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jmoneco.2014.05.004 Byline: Erica X.N. Li, Francisco Palomino 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. Author Affiliation: (a) Cheung Kong Graduate School of Business, Beijing 100738, China (b) The University of Michigan, Ross School of Business, Ann Arbor, MI 48109, United States Article History: Received 14 November 2011; Revised 8 May 2014; Accepted 8 May 2014 Article Note: (footnote) [star] This paper is a substantially revised version of a paper that previously circulated as "Monetary Policy Risk and the Cross-Section of Stock Returns."

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Gale Document Number: GALE|A378435979