We study the effect of monetary policy on the equity premium using a segmented stock market model. Optimal monetary policy in our model involves risk-sharing and is countercyclical with respect to dividend shocks; thus, it implies low equity return compared to other policies, including inflation...

We explore the role of monetary policy in a world of segmented financial markets, where only the agents who trade stocks encounter financial income risk. In such an economy, the welfare maximizing monetary policy attains the novel role of sharing the financial market risk traders face, among all...