The Risk Premium Channel and Long-Term Growth
68 Pages Posted: 7 Dec 2017
Date Written: December 4, 2017
We study a quantitative DSGE model linking a state of the art asset pricing framework à 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 constrained 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
Suggested Citation: Suggested Citation