Business-Cycle Macroeconomics in an Asset Pricing Financial Economy

87 Pages Posted: 3 Apr 2020 Last revised: 5 Apr 2021

See all articles by Wai Man Tse

Wai Man Tse

Chu Hai College of Higher Education

Date Written: March 9, 2020

Abstract

The paper introduces a portfolio-based Keynesian endogenous business-cycle phase-switching macroeconomic model of risky investment where rational expectation occurs in the financial market with stocks, credits, and debt. There are stock market inefficiency and predictability. It predicts Okun’s Law, the Philips Curve, and the classics-monetarist-Keynesian Quantity Theory of Money. Whereas the classics and Keynesian differ on equilibrium versus disequilibrium, it justifies the monetarist-Keynesian difference by price rigidity. It tracks the U.S. financial and economic data during the 2008’s recession. Jump credit risks induce cyclical financial and macroeconomic fluctuations, and the equity-premium and risk-free rate puzzles. Market risk premium and credit risks show a significant impact of the financial sector on the real economy. To promote financial and economic growth, cutting interest rates is most effective at peak and trough. Curtailing credits at peak prolong growth. Enhancing credits and consumption growth stimulate GDP growth in a recession.

Keywords: Keynesian dynamic stochastic general disequilibrium model, asset pricing, credit and liquidity risks, business cycles, financial and economic crisis

JEL Classification: E12, E32, E44, E52, G01, G12

Suggested Citation

Tse, Wai Man, Business-Cycle Macroeconomics in an Asset Pricing Financial Economy (March 9, 2020). Available at SSRN: https://ssrn.com/abstract=3551060 or http://dx.doi.org/10.2139/ssrn.3551060

Wai Man Tse (Contact Author)

Chu Hai College of Higher Education ( email )

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New Territories
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