Extreme inflation and time-varying expected consumption growth

Ilya Dergunov, Christoph Meinerding and Christian Schlag

No 334, SAFE Working Paper Series from Leibniz Institute for Financial Research SAFE

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 stockbond 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 (search for similar items in EconPapers)
JEL-codes: E31 E44 G12 (search for similar items in EconPapers)
Date: 2022
New Economics Papers: this item is included in nep-cwa, nep-fdg, nep-mac, nep-ore and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Journal Article: Extreme Inflation and Time-Varying Expected Consumption Growth (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:safewp:334

DOI: 10.2139/ssrn.4001498

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