Durable Goods, Inflation Risk and the Equilibrium Asset Prices
University of Wisconsin - Madison - Department of Finance, Investment and Banking
University of Pennsylvania - Finance Department
University of Wisconsin - Madison - School of Business; University of Pennsylvania - The Wharton School; Indiana University - Kelley School of Business - Department of Finance
AFA 2013 San Diego Meetings Paper
High inflation predicts a decline in future real consumption and equity cash-flows, and the inflation non-neutrality is stronger for durable than for non-durable goods. This suggests that durables is an important channel through which inflation affects long-term aggregate growth and ultimately, asset prices. We derive and estimate an equilibrium two good nominal economy with recursive utility over durable and nondurable consumption, persistent variations in real expected growth and inflation, and inflation non-neutrality. Our model can quantitatively account for the unconditional moments and conditional movements in prices of nominal bonds and equity in durable and nondurable sectors. In the model, as in the data, durable equities earn higher risk premia, correlate more negatively with expected inflation and more positively with returns on bonds than nondurable stocks. We show that two-good structure, early resolution of uncertainty and inflation non-neutrality play the key role to explain these data features.
Number of Pages in PDF File: 56
Keywords: durable consumption, inflation risk, long-run risks, equilibrium yield curve, equilibrium equity returnworking papers series
Date posted: March 17, 2011 ; Last revised: May 14, 2014
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