Risk premiums and macroeconomic dynamics in a heterogeneous agent model

Ferre De Graeve, Maarten Dossche, Marina Emiris, Henri Sneessens and Raf Wouters
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Marina Emiris: National Bank of Belgium, Research Department

No 150, Working Paper Research from National Bank of Belgium

Abstract: We analyze financial risk premiums and real economic dynamics in a DSGE model with three types of agents - shareholders, bondholders and workers - that differ in participation in the capital market and in terms of risk aversion. Aggregate productivity and distribution risk are shared among these agents via the bond market and via an efficient labor contract. The result is a combination of volatile returns to capital and a highly cyclical consumption process for the shareholders, which are two important ingredients for generating high and countercyclical risk premiums. These risk premiums are consistent with a strong propagation mechanism through an elastic supply of labor, rigid real wages and a countercyclical labor share. We discuss the implications for the real and nominal component of the risk premium on equity and bonds. We show how these premiums react to changes in the volatility of the shocks, as experienced during the great moderation. We also analyze the effects of changes in monetary policy behavior and the resulting inflation dynamics.

JEL-codes: E32 E44 G12 (search for similar items in EconPapers)
Pages: 60 pages
Date: 2008-10
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Risk premiums and macroeconomic dynamics in a heterogeneous agent model (2010)
Working Paper: Risk Premiums and Macroeconomic Dynamics in a Heterogeneous Agent Model (2010)
Working Paper: Risk Premiums and Macroeconomic Dynamics in a Heterogeneous Agent Model (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:nbb:reswpp:200810-25

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