THE SPIRIT OF CAPITALISM, ASSET RETURNS, AND THE BUSINESS CYCLE

Martin Boileau and Rebecca Braeu

Macroeconomic Dynamics, 2007, vol. 11, issue 2, 214-230

Abstract: We evaluate whether the spirit of capitalism improves the ability of the real business cycle model to explain the main features of both asset return and the business cycle. In our model, the spirit of capitalism is embodied in the assumption that individuals have preferences for financial wealth. Our simulation results suggest that this assumption may improve the model's ability to explain the risk-free rate puzzle but not the equity premium puzzle. This assumption also markedly deteriorates the model's ability to account for the main features of the business cycle.

Date: 2007
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