The Risk Premium Channel and Long-Term Growth

68 Pages Posted: 7 Dec 2017

See all articles by Malte Schumacher

Malte Schumacher

University of Zurich - Department of Business Administration

Dawid Żochowski

European Central Bank

Multiple version iconThere are 2 versions of this paper

Date Written: December 4, 2017

Abstract

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

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

Malte Schumacher

University of Zurich - Department of Business Administration ( email )

Rämistrasse 71
Zurich, CH-8006
Switzerland

Dawid Żochowski (Contact Author)

European Central Bank ( email )

Sonnemannstrasse 20
Frankfurt am Main, 60314
Germany

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