The Risk Premium Channel and Long-Term Growth

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

Schumacher, Malte and Żochowski, Dawid, The Risk Premium Channel and Long-Term Growth (December 4, 2017). ECB Working Paper No. 2114, ISBN: 978-92-899-3030-7, Available at SSRN: https://ssrn.com/abstract=3083457 or http://dx.doi.org/10.2139/ssrn.3083457