Asset Pricing Lessons for Modeling Business Cycles

54 Pages Posted: 11 Jul 2000  

Michele Boldrin

University of Minnesota - Twin Cities - Department of Economics; Universidad Carlos III de 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 )

271 19th Avenue South
Minneapolis, MN 55455
United States
612-624-4551 (Phone)
612-624-0209 (Fax)

Universidad Carlos III de Madrid - Department of Economics

Calle Madrid 126
Getafe, 28903
Spain

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Lawrence J. Christiano (Contact Author)

Northwestern University ( email )

2003 Sheridan Road
Evanston, IL 60208
United States
847-491-8231 (Phone)
847-491-7001 (Fax)

Federal Reserve Bank of Cleveland

East 6th & Superior
Cleveland, OH 44101-1387
United States

Federal Reserve Bank of Chicago

230 South LaSalle Street
Chicago, IL 60604
United States

Federal Reserve Bank of Minneapolis

90 Hennepin Avenue
Minneapolis, MN 55480
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jonas D. M. Fisher

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

230 South LaSalle Street
Chicago, IL 60604-1413
United States

Paper statistics

Downloads
43
Abstract Views
1,104