Long-Run Economic Uncertainty

55 Pages Posted: 14 Oct 2018 Last revised: 24 Nov 2018

See all articles by Federico M. Bandi

Federico M. Bandi

Johns Hopkins University - Carey Business School

Lorenzo Bretscher

London Business School - Department of Finance

Andrea Tamoni

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick

Date Written: November 17, 2018

Abstract

Higher levels of long-run economic uncertainty are shown to predict larger risk premia as well as lower inflation rates, lower consumption growth and lower output growth over business-cycle to generational horizons. When seen through an asset pricing lens, the relation between long-run uncertainty and future inflation rates is a necessary by-product of three conditions: the (near) orthogonality of long-run uncertainty with respect to the dividend-to-price ratio, the ability of long-run uncertainty to strongly predict future risk premia, and its inability to predict nominal cash flows and real interest rates. A general class of equilibrium models with price rigidities is used to provide an economic channel.

Keywords: financial uncertainty, policy uncertainty, macro uncertainty, the long run, the real economy

JEL Classification: C22, E32, E44, G12, G17

Suggested Citation

Bandi, Federico Maria and Bretscher, Lorenzo and Tamoni, Andrea, Long-Run Economic Uncertainty (November 17, 2018). Available at SSRN: https://ssrn.com/abstract=3253811 or http://dx.doi.org/10.2139/ssrn.3253811

Federico Maria Bandi

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

Lorenzo Bretscher

London Business School - Department of Finance ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom

Andrea Tamoni (Contact Author)

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick ( email )

1 Washington Park
Newark, NJ 07102
United States

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