A quartet of asset pricing models in nominal and real economies

This paper studies the equity premium implications of a canonical New Keynesian model with investment. We find that the presence of a time-varying marginal cost dampens the expansionary impact of a positive technology shock. With a given fraction of firms standing ready to satisfy demand at predetermined prices, the variations in the marginal utility of consumption attributed to technology shocks can easily be smoothed. Thus, technology shocks contribute little to the equity premium. Under a standard monetary policy rule, the real effect of monetary policy shocks is too weak and short-lived to generate a reasonable equity premium.