Asset Pricing Lessons for Modeling Business Cycles

54 Pages Posted: 11 Jul 2000 Last revised: 19 Nov 2022

See all articles by Michele Boldrin

Michele Boldrin

University of Minnesota - Twin Cities - Department of Economics; Charles III University of Madrid - Department of Economics; Centre for Economic Policy Research (CEPR)

Lawrence J. Christiano

Northwestern University; Federal Reserve Bank of Cleveland; Federal Reserve Bank of Chicago; Federal Reserve Bank of Minneapolis; National Bureau of Economic Research (NBER)

Jonas D. M. Fisher

Federal Reserve Bank of Chicago - Economic Research Department

Date Written: September 1995

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 accounting 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 persistence 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.

Suggested Citation

Boldrin, Michele and Christiano, Lawrence J. and Fisher, Jonas D. M., Asset Pricing Lessons for Modeling Business Cycles (September 1995). NBER Working Paper No. w5262, Available at SSRN: https://ssrn.com/abstract=225326

Michele Boldrin

University of Minnesota - Twin Cities - Department of Economics ( email )

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Charles III University of Madrid - Department of Economics

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Centre for Economic Policy Research (CEPR)

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Lawrence J. Christiano (Contact Author)

Northwestern University ( email )

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Federal Reserve Bank of Chicago

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National Bureau of Economic Research (NBER)

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Jonas D. M. Fisher

Federal Reserve Bank of Chicago - Economic Research Department ( email )

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