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Macro-Finance

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  • John H. Cochrane

Abstract

Macro-finance addresses the link between asset prices and economic fluctuations. Many models reflect the same rough idea: the market’s ability to bear risk is greater in good times, and less in bad times. Models achieve this similar result by quite different mechanisms. I contrast their strengths and weaknesses. I highlight directions for future research, including additional facts to be matched, and limitations of the models that should prod future theoretical work. I describe how macro-finance models can fundamentally alter macroeconomics, by putting time-varying risk premiums and risk-bearing capacity at the center of recessions rather than variation in the interest rate and intertemporal substitution.

Suggested Citation

  • John H. Cochrane, 2017. "Macro-Finance," Review of Finance, European Finance Association, vol. 21(3), pages 945-985.
  • Handle: RePEc:oup:revfin:v:21:y:2017:i:3:p:945-985.
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    More about this item

    Keywords

    Macro-finance; Equity premium; Volatility Received December 30; 2016; accepted January 23; 2017 by Editor Alex Edmans.;

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models

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