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Risk Premiums and Macroeconomic Dynamics in a Heterogeneous Agent Model

Listed author(s):
  • De Graeve, Ferre

    ()

    (Research Department, Central Bank of Sweden)

  • Dossche, Maarten

    (National Bank of Belgium)

  • Emiris, Marina

    (Bank of Canada)

  • Sneessens, Henri

    (University of Luxembourg)

  • Wouters, Raf

    (National Bank of Belgium)

We analyze financial risk premiums and real economic dynamics in a DSGE model with three types of agents - shareholders, bondholders and workers - that differ in participation in the capital market and in attitude towards risk and intertemporal substitution. Aggregate productivity and distribution risks are transferred across these agents via the bond market and via an efficient labor contract. The result is a combination of volatile returns to capital and a highly cyclical consumption process for the shareholders, which are two important ingredients for generating high and countercyclical risk premiums. These risk premiums are consistent with a strong propagation mechanism through an elastic supply of labor, rigid real wages and a countercyclical labor share. Based on the empirical estimates for the two sources of real macroeconomicrisk, the model generates significant and plausible time variation in both bond and equity risk premiums. Interestingly, the single largest jump in both the risk premium and the price of risk is observed during the current recession.

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Paper provided by Sveriges Riksbank (Central Bank of Sweden) in its series Working Paper Series with number 236.

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Length: 44 pages
Date of creation: 01 Jan 2010
Handle: RePEc:hhs:rbnkwp:0236
Contact details of provider: Postal:
Sveriges Riksbank, SE-103 37 Stockholm, Sweden

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Fax: 08-21 05 31
Web page: http://www.riksbank.com/
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