Trend Growth Shocks and Asset Prices

69 Pages Posted: 25 Jan 2019 Last revised: 13 Nov 2019

See all articles by Nam Gang Lee

Nam Gang Lee

Bank of Korea - Economic Research Institute

Date Written: January 25, 2019


This paper addresses the link between shocks to productivity trend growth and long-run consumption risk in a production economy model with recursive utility. Quantifying trend growth shocks, I find that persistent fluctuations in trend growth are the key driver of sizable long-run consumption risk. I compare this result to two conventional assumptions on a productivity process: 1) a deterministic trend with a cycle and 2) a random walk with drift. Persistent trend growth shocks generate larger long-run consumption risk than both highly persistent cycle shocks and random walk shocks. As a result, agents in the face of the trend growth shocks tend to save more and demand a higher equity premium. In addition, fluctuations in aggregate productivity growth is largely attributable to movements in trend growth.

Keywords: Long-run consumption risk, stochastic trend growth, equity premium, production economy, exact initial Kalman filter

JEL Classification: E21, E23, E30, G12

Suggested Citation

Lee, Nam Gang, Trend Growth Shocks and Asset Prices (January 25, 2019). Bank of Korea WP 2019-4. Available at SSRN: or

Nam Gang Lee (Contact Author)

Bank of Korea - Economic Research Institute ( email )

110, 3-Ga, Namdaemunno, Jung-Gu
Seoul 100-794
Korea, Republic of (South Korea)

Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
PlumX Metrics