The Risk Premium Channel and Long-Term Growth
65 Pages Posted: 26 Sep 2017
Date Written: September 24, 2017
We study a quantitative DSGE model linking a state of the art asset pricing framework a la Kung and Schmid (2015) with a constraint on leverage as in Gertler and Kiyotaki (2010). We show that a mere increase in the probability of firms being financially constraint leads to an increase in risk premia. Even for a small adverse shock to productivity a drop in asset valuation restrains firms from outside financing and by that induces a persistent low growth environment. In our framework a constraint on leverage induces countercyclical risk premia in equity markets even when it does not bind.
Keywords: Risk Premia, Financial Accelerator, Asset Pricing, Endogenous Growth
JEL Classification: D53, G01, G12
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