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Pricing Assets in a Perpetual Youth Model

Author

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  • Roger E. A. Farmer

    (UCLA)

Abstract

This paper constructs a general equilibrium model where asset price fluctuations are caused by random shocks to beliefs about the future price level that reallocate consumption across generations. In this model, asset prices are volatile, and price-earnings ratios are persistent, even though there is no fundamental uncertainty and financial markets are sequentially complete. I show that the model can explain a substantial risk premium while generating smooth time series for consumption. In my model, asset price fluctuations are Pareto inefficient and there is a role for treasury or central bank intervention to stabilize asset price volatility. (Copyright: Elsevier)

Suggested Citation

  • Roger E. A. Farmer, 2018. "Pricing Assets in a Perpetual Youth Model," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 30, pages 106-124, October.
  • Handle: RePEc:red:issued:17-287
    DOI: 10.1016/j.red.2018.04.003
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Asset prices; Equity premium; Sunspots;

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • G1 - Financial Economics - - General Financial Markets

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