Asset Pricing Implications in a Production Economy with Regimes

Abstract:     
Unless extreme forms of rigidity are allowed, standard Real Business Cycle models are well known to generate counterfactual asset pricing implications. This paper seeks to circumvent all such rigidities by providing a simple extension to the prior literature, where we study an economy that switches between booms and busts, in conjunction with Epstein-Zin preferences for the consumers.

We first provide a detailed theoretical and numerical analysis on the model's predictions. Then, we show that a reasonable parametrization of our "rigidity-free'' model conveys plausible financial figures that are in line with empirical observations over the U.S. postwar economy.

Working Paper Series