Accounting for Macro-Finance Trends: Market Power, Intangibles, and Risk Premia

62 Pages Posted: 14 Dec 2018 Last revised: 1 May 2019

See all articles by Emmanuel Farhi

Emmanuel Farhi

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Francois Gourio

Federal Reserve Bank of Chicago

Multiple version iconThere are 2 versions of this paper

Date Written: 2018-11-01

Abstract

Real risk-free interest rates have trended down over the past 30 years. Puzzlingly in light of this decline, (1) the return on private capital has remained stable or even increased, creating an increasing wedge with safe interest rates; (2) stock market valuation ratios have increased only moderately; (3) investment has been lackluster. We use a simple extension of the neoclassical growth model to diagnose the nexus of forces that jointly accounts for these developments. We find that rising market power, rising unmeasured intangibles, and rising risk premia, play a crucial role, over and above the traditional culprits of increasing savings supply and technological growth slowdown.

Keywords: investment, equity premium, risk-free rate, profitability, valuation ratios, labor share, competition, markups, safe assets

JEL Classification: E32, G12

Suggested Citation

Farhi, Emmanuel and Gourio, Francois, Accounting for Macro-Finance Trends: Market Power, Intangibles, and Risk Premia (2018-11-01). FRB of Chicago Working Paper No. WP-2018-19. Available at SSRN: https://ssrn.com/abstract=3301237 or http://dx.doi.org/10.21033/wp-2018-19

Emmanuel Farhi (Contact Author)

Harvard University - Department of Economics ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Francois Gourio

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States

HOME PAGE: http://sites.google.com/site/fgourio

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