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Asset Pricing Lessons for Modeling Business Cycles

Author

Listed:
  • Boldrin, M.
  • Christiano, L.J.
  • Fisher, J.D.M.

Abstract

We develop a model which accounts for the observed equity premium and average risk free rate, without implying counterfactually high risk aversion. The model also does well in aceounting for business cycle phenomena. With respect to the conventional measures of business cycle volatility and comovement with output, the model does roughly as well as the standard business cycle model. On two other dimensions, the model's business cycle implications are actually improved. Its enhanced internal propagation allows it to account for the fact that there is positive persistenee in output growth, and the model also provides a resolution to the "excess sensitivity puzzle" for consumption and income. Key features of the model are habit persistence preferences, and a multisector technology with limited intersectoral mobility of factors of production.
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Suggested Citation

  • Boldrin, M. & Christiano, L.J. & Fisher, J.D.M., 1995. "Asset Pricing Lessons for Modeling Business Cycles," University of Western Ontario, Departmental Research Report Series 9513, University of Western Ontario, Department of Economics.
    • Handle: RePEc:uwo:uwowop:9513
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    File URL: https://ir.lib.uwo.ca/cgi/viewcontent.cgi?article=1453&context=economicsresrpt
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    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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