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Asset pricing, habit memory, and the labor market

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  • Jaccard, Ivan

Abstract

This article studies the asset pricing and the business cycle implications of habit formation in a production economy with capital adjustment costs and endogenous labor supply. A specification of internal habit in the mix of consumption and leisure which minimizes the wealth effect on labor supply is introduced into an otherwise standard real business cycle model. This mechanism enhances the model’s ability to explain asset pricing puzzles. JEL Classification: G12, E32, J22

Suggested Citation

  • Jaccard, Ivan, 2010. "Asset pricing, habit memory, and the labor market," Working Paper Series 1163, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20101163
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    References listed on IDEAS

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    1. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, pages 145-161.
    2. Jean-Pierre Danthine & John B. Donaldson & Paolo Siconolfi, 2005. "Distribution Risk and Equity Returns," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 05.10, Université de Lausanne, Faculté des HEC, DEEP.
    3. TallariniJr., Thomas D., 2000. "Risk-sensitive real business cycles," Journal of Monetary Economics, Elsevier, vol. 45(3), pages 507-532, June.
    4. Morris A. Davis, 2010. "housing and the business cycle," The New Palgrave Dictionary of Economics, Palgrave Macmillan.
    5. Rudebusch, Glenn D. & Swanson, Eric T., 2008. "Examining the bond premium puzzle with a DSGE model," Journal of Monetary Economics, Elsevier, vol. 55(Supplemen), pages 111-126, October.
    6. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-1445, November.
    7. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-1370, November.
    8. Fatih Guvenen, 2009. "A Parsimonious Macroeconomic Model for Asset Pricing," Econometrica, Econometric Society, vol. 77(6), pages 1711-1750, November.
    9. Ferson, Wayne E. & Constantinides, George M., 1991. "Habit persistence and durability in aggregate consumption: Empirical tests," Journal of Financial Economics, Elsevier, vol. 29(2), pages 199-240, October.
    10. Wei, Chao, 2009. "A quartet of asset pricing models in nominal and real economies," Journal of Economic Dynamics and Control, Elsevier, vol. 33(1), pages 154-165, January.
    11. Greenwood, Jeremy & Hercowitz, Zvi & Huffman, Gregory W, 1988. "Investment, Capacity Utilization, and the Real Business Cycle," American Economic Review, American Economic Association, pages 402-417.
    12. Jean-Pierre Danthine & John B. Donaldson, 2002. "Labour Relations and Asset Returns," Review of Economic Studies, Oxford University Press, vol. 69(1), pages 41-64.
    13. Abel, Andrew B., 1999. "Risk premia and term premia in general equilibrium," Journal of Monetary Economics, Elsevier, vol. 43(1), pages 3-33, February.
    14. Jermann, Urban J., 1998. "Asset pricing in production economies," Journal of Monetary Economics, Elsevier, vol. 41(2), pages 257-275, April.
    15. David A. Chapman, 1998. "Habit Formation and Aggregate Consumption," Econometrica, Econometric Society, vol. 66(5), pages 1223-1230, September.
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    Citations

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    Cited by:

    1. Peter A. Schmid, 2013. "The destabilizing effect of company income taxation," Society and Economy, Akadémiai Kiadó, Hungary, vol. 35(3), pages 365-388, September.
    2. Michael Ehrmann & Marcel Fratzscher & Refet S Güürkaynak & Eric T Swanson, 2011. "Convergence and Anchoring of Yield Curves in the Euro Area," The Review of Economics and Statistics, MIT Press, pages 350-364.
    3. François Gourio, 2013. "Credit Risk and Disaster Risk," American Economic Journal: Macroeconomics, American Economic Association, vol. 5(3), pages 1-34, July.
    4. Ivan Jaccard, 2010. "Asset Pricing and Housing Supply in a Production Economy," 2010 Meeting Papers 605, Society for Economic Dynamics.
    5. Jaccard Ivan, 2011. "Asset Pricing and Housing Supply in a Production Economy," The B.E. Journal of Macroeconomics, De Gruyter, pages 1-40.
    6. Francois Gourio, 2012. "Disaster Risk and Business Cycles," American Economic Review, American Economic Association, pages 2734-2766.
    7. Francois Gourio, 2012. "Disaster Risk and Business Cycles," American Economic Review, American Economic Association, pages 2734-2766.
    8. Jaccard, Ivan, 2012. "Asset pricing and housing supply in a production economy," Working Paper Series 1454, European Central Bank.
    9. Rudebusch, Glenn D. & Swanson, Eric T., 2008. "Examining the bond premium puzzle with a DSGE model," Journal of Monetary Economics, Elsevier, vol. 55(Supplemen), pages 111-126, October.
    10. Domenico Giannone & Jérôme Henry & Magdalena Lalik & Michele Modugno, 2012. "An Area-Wide Real-Time Database for the Euro Area," The Review of Economics and Statistics, MIT Press, pages 1000-1013.
    11. Gourio, François, 2012. "Macroeconomic implications of time-varying risk premia," Working Paper Series 1463, European Central Bank.
    12. Borenstein, Eliezer & Elkayam, David, 2014. "The equity premium in a small open economy and an application to Israel," Economic Modelling, Elsevier, vol. 43(C), pages 81-99.

    More about this item

    Keywords

    adjustment costs; equity premium puzzle; Labor supply;

    JEL classification:

    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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