Production, Collateral and the Risk-Free Rate
In this paper, I examine the implications of collateral constraints in a production economy and demonstrate that collateral constraints may have a role to play in resolving two outstanding puzzles: the risk-free rate puzzle and the total factor productivity puzzle. The first puzzle, as noted by Mehra and Prescott (1985), Weil (1989) and others is simply that it is difficult to obtain plausible values of the risk-free real interest rate in production economies without assuming implausibly high values of risk-aversion. This paper demonstrates that the risk-free real interest is related to idiosyncratic productivity risk through the collateral constraint and that a low risk-free real interest rate can be obtained for small, and plausible, values of risk-aversion. The second puzzle is more recent - namely why has the risk-free real interest rate fallen while measured total factor productivity has risen during the 1990's in the United States? The argument put forth here is that the level and persistence of idiosyncratic productivity risk is related to measured aggregate total factor productivity and the risk-free real interest rate via the collateral constraint. Hence, increases in aggregate total factor productivity that occur in conjunction with decreases in the risk-free real interest rate may simply reflect unanticipated increases in the level (or persistence) of idiosyncratic productivity risk
To our knowledge, this item is not available for
download. To find whether it is available, there are three
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
|Date of creation:||03 Dec 2006|
|Date of revision:|
|Contact details of provider:|| Postal: Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA|
Web page: http://www.EconomicDynamics.org/
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:red:sed006:448. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann)
If references are entirely missing, you can add them using this form.