Does Money Help to Rescue the Consumption-CAPM?

Abstract

This paper offers a simple macroeconomic asset pricing model that extends the consumption model by adding the growth in real money balances as a risk factor. The results from Euler equations estimation show that the monetary model improves significantly the baseline model in terms of pricing errors. Yet, the parameter estimates are economically implausible in most cases. Specifically, the estimates for the share of money in the utility function are very large in economic terms. The results for a linear version of the monetary model show that it cannot outperform the standard CCAPM in explaining cross-sectional risk premia.