Extreme Inflation and Time-Varying Expected Consumption Growth

88 Pages Posted: 5 Jan 2022

See all articles by Ilya Dergunov

Ilya Dergunov

Australian National University (ANU); Goethe University Frankfurt - Research Center SAFE

Christoph Meinerding

Deutsche Bundesbank

Christian Schlag

Goethe University Frankfurt; Leibniz Institute for Financial Research SAFE

Multiple version iconThere are 2 versions of this paper

Date Written: January 3, 2022

Abstract

In a parsimonious regime switching model, we find strong evidence that expected consumption growth varies over time. Adding inflation as a second variable, we uncover two states in which expected consumption growth is low, one with high and one with negative expected inflation. Embedded in a general equilibrium asset pricing model with learning, these dynamics replicate the observed time variation in stock return volatilities and stock- bond return correlations. They also provide an alternative derivation for a measure of time-varying disaster risk suggested by Wachter (2013), implying that both the disaster and the long-run risk paradigm can be extended towards explaining movements in the stock-bond correlation.

Keywords: Long-run risk, inflation, recursive utility, filtering, disaster risk

JEL Classification: E31, E44, G12

Suggested Citation

Dergunov, Ilya and Meinerding, Christoph and Schlag, Christian, Extreme Inflation and Time-Varying Expected Consumption Growth (January 3, 2022). SAFE Working Paper No. 334, Available at SSRN: https://ssrn.com/abstract=4001498 or http://dx.doi.org/10.2139/ssrn.4001498

Ilya Dergunov

Australian National University (ANU) ( email )

Canberra, Australian Capital Territory 2601
Australia

Goethe University Frankfurt - Research Center SAFE

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

Christoph Meinerding

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Christian Schlag (Contact Author)

Goethe University Frankfurt ( email )

Faculty of Economics and Business
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, Hessen 60323
Germany

Leibniz Institute for Financial Research SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany
+49 69 798 33699 (Phone)

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