Posted: 23 Jun 2007 Last revised: 19 Apr 2014
Date Written: August 31, 2013
Traditional pre-1929 consumption measures understate the extent of serial correlation in the U.S. annual real growth rate of per capita consumption of non-durables and services due to measurement limitations in the construction of their major components. Under alternative measures proposed in this study, the serial correlation of consumption growth is 0.42 for the 1899−2009, contrary to the estimate of −0.15 under the traditional measures. This new evidence implies that the class of economies studied by Mehra and Prescott  generates negative equity premium for reasonable risk aversion levels. Thus further exacerbating the equity premium puzzle.
Keywords: Persistence, Consumption Growth, Equity Premium Puzzle, Neoclassical Growth Model
JEL Classification: E32, E44, G11, G13
Suggested Citation: Suggested Citation