Durable Goods, Inflation Risk, and Equilibrium Asset Prices
Review of Financial Studies (2016) 29(1): 193-231
62 Pages Posted: 17 Mar 2011 Last revised: 11 Jan 2016
Date Written: January 1, 2015
High expected inflation is known to have a negative impact on future real growth. We show that this effect is significantly more pronounced in durable relative to non-durable goods sectors of the economy. Consistent with this macroeconomic evidence, the equity returns of durable-goods-producing firms have a larger negative exposure to expected inflation risks. We estimate a recursive utility model which features persistent growth fluctuations and inflation non-neutrality for durable and non-durable consumption. Our model can quantitatively account for the key moments of nominal bond prices and the levels, volatilities, and exposures of equity returns to expected inflation and bond returns.
Keywords: durable consumption, inflation risk, long-run risks, equilibrium yield curve, equilibrium equity return
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