Equity Returns and Business Cycles in Small Open Economies
40 Pages Posted: 16 Sep 2011 Last revised: 20 Aug 2013
Date Written: June 1, 2012
This is the first paper in the DSGE literature to match key business cycle moments and long-run equity returns in a small open economy with production. These results are achieved by introducing four modifications to a standard real business cycle model: (1) borrowing and lending costs are imposed to increase the volatility of the marginal rate of substitution over time; (2) capital adjustment costs are assumed to make equity returns more volatile; (3) GHH preferences are employed to smooth consumption and (4) a working capital constraint to generate countercyclical trade balances. Our results are based on data from Argentina, Brazil, and Chile.
Keywords: Asset Pricing, Equity Returns, Dynamic Stochastic General Equilibrium Model, Real Business Cycle, Small Open Economy
JEL Classification: E32, E44, F41, G12, G15
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