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The risk premium channel and long-term growth

Author

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  • Schumacher, Malte D.
  • Żochowski, Dawid

Abstract

We study a quantitative DSGE model linking a state of the art asset pricing framework a la Kung and Schmid (2015) with a constraint on leverage as in Gertler and Kiyotaki a (2010). We show that a mere increase in the probability of firms being financially constrained leads to an increase in risk premia. Even for a small adverse shock to productivity a drop in asset valuation restrains firms from outside financing and by that induces a persistent low growth environment. In our framework a constraint on leverage induces countercyclical risk premia in equity markets even when it does not bind. JEL Classification: D53, G01, G12

Suggested Citation

  • Schumacher, Malte D. & Żochowski, Dawid, 2017. "The risk premium channel and long-term growth," Working Paper Series 2114, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20172114
    Note: 2152671
    as

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    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecb.wp2114.en.pdf
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    References listed on IDEAS

    as
    1. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393, Elsevier.
    2. Bilbiie, Florin O. & Fujiwara, Ippei & Ghironi, Fabio, 2014. "Optimal monetary policy with endogenous entry and product variety," Journal of Monetary Economics, Elsevier, vol. 64(C), pages 1-20.
    3. Daisuke Ikeda & Takushi Kurozumi, 2019. "Slow Post-financial Crisis Recovery and Monetary Policy," American Economic Journal: Macroeconomics, American Economic Association, vol. 11(4), pages 82-112, October.
    4. Ctirad Slavik, 2011. "Asset Prices and Business Cycles with Financial Frictions," 2011 Meeting Papers 587, Society for Economic Dynamics.
    5. Diego Anzoategui & Diego Comin & Mark Gertler & Joseba Martinez, 2019. "Endogenous Technology Adoption and R&D as Sources of Business Cycle Persistence," American Economic Journal: Macroeconomics, American Economic Association, vol. 11(3), pages 67-110, July.
    6. Diego Comin & Ana Maria Santacreu & Mark Gertler & Phuong Ngo, 2018. "Stock Price Fluctuations and Productivity Growth," 2018 Meeting Papers 1147, Society for Economic Dynamics.
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    Cited by:

    1. Carsten M. Stann & Theocharis N. Grigoriadis, 2020. "Monetary Policy Transmission to Russia and Eastern Europe," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 62(2), pages 303-353, June.

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    More about this item

    Keywords

    asset pricing; endogenous growth; financial accelerator; risk premia;
    All these keywords.

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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