Disaster risk and preference shifts in a New Keynesian model

Marlène Isoré and Urszula Szczerbowicz

MPRA Paper from University Library of Munich, Germany

Abstract: This paper analyzes the effects of a change in a small but time-varying “disaster risk” à la Gourio (2012) in a New Keynesian model. In a real business cycle framework, the disaster risk has been successful in replicating observed moments of equity premia. However, responses of macroeconomic variables critically depend on the value of the elasticity of intertemporal substitution (EIS). In particular, we show here that an increase in the probability of disaster causes a recession only in case of an EIS larger than unity, which may be arbitrarily large. Nevertheless, we also find that incorporating sticky prices allows to conciliate recessionary effects of the disaster risk with a plausible value of the EIS. A higher disaster risk is then also associated with an increase in the discount factor and with deflation, making it consistent with the preference shock literature (Christiano et al., 2011).

Keywords: disaster risk; rare events; uncertainty; asset pricing; DSGE models; New Keynesian models; business cycles (search for similar items in EconPapers)
JEL-codes: E20 E31 E32 E44 G12 Q54 (search for similar items in EconPapers)
Date: 2015-07-15
New Economics Papers: this item is included in nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Related works:
Journal Article: Disaster risk and preference shifts in a New Keynesian model (2017)
Working Paper: Disaster Risk and Preference Shifts in a New Keynesian Model (2016)
Working Paper: Disaster Risk and Preference Shifts in a New Keynesian Model (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:65643

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