54 Pages Posted: 11 Jul 2000
Date Written: September 1995
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: 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
By Andrew Abel