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The risk premium channel and long-term growth

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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
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    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecb.wp2114.en.pdf
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    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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