Title: Asset pricing implications of a New Keynesian model
Description: "To match the stylised facts of goods and labour markets, the canonical New Keynesian model  augments the optimising neoclassical growth model with nominal and real rigidities. We ask what  the implications of this type of model are for asset prices. Using a second-order approximation,  we examine bond and equity returns, the equity risk premium, and the behaviour of the real and  nominal term structure. We catalogue the factors that are most important for determining the size  of risk premia and the slope and level of the yield curve. In a world of technology shocks only,  increasing the degree of real rigidities raises risk premia and increasing nominal rigidities reduces  risk premia. In a world of monetary policy shocks only, both real and nominal rigidities raise risk  premia. The results indicate that the implications of the New Keynesian model for average asset  returns depend critically on the characterisation of shocks hitting the model economy."--Bank of England web site.