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Creator: Mehra, Rajnish, Piguillem, Facundo, and Prescott, Edward C. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 655 Abstract:
There is a large amount of intermediated borrowing and lending between households. Some of it is intergenerational, but most is between older households. The average difference in borrowing and lending rates is over 2 percent. In this paper, we develop a model economy that displays these facts and matches not only the returns on assets but also their quantities. The heterogeneity giving rise to borrowing and lending and differences in equity holdings depends on differences in the strength of the bequest motive. In equilibrium, the lenders are annuity holders and the borrowers are those who have equity holdings, who live off its income when retired, and who leave a bequest. The borrowing rate and return on equity are the same in the absence of aggregate uncertainty. The divergence between borrowing and lending rates can thus give rise to an equity premium, even in a world without aggregate uncertainty.
Parola chiave: Retirement, Equity premium, Government debt, Borrowing, Aggregate intermediation, Life cycle savings, and Lending Soggetto: H62 - National Deficit; Surplus, G23 - Pension Funds; Non-bank Financial Institutions; Financial Instruments; Institutional Investors, G11 - Portfolio Choice; Investment Decisions, D31 - Personal Income, Wealth, and Their Distributions, E21 - Macroeconomics: Consumption; Saving; Wealth, G12 - Asset Pricing; Trading Volume; Bond Interest Rates, E20 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy: General (includes Measurement and Data), E44 - Financial Markets and the Macroeconomy, H00 - Public Economics: General, and G10 - General Financial Markets: General (includes Measurement and Data)