Intermediated quantities and returns
By: Rajnish Mehra, Edward C. Prescott, and Facundo Piguillem.
Contributors: Piguillem, Facundo.; Prescott, Edward C.; Federal Reserve Bank of Minneapolis. Research Dept.
Series: Working paper / Federal Reserve Bank of Minneapolis, Research Dept -- 655
Publisher: Federal Reserve Bank of Minneapolis, Research Dept.
Published: 2007
Place of publication: [Minneapolis, MN]
Language: eng
Format: Electronic resource
Description: 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.
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"September 2007."

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