Disaster Risk and Preference Shifts in a New Keynesian Model
Marlène Isoré () and
Urszula Szczerbowicz ()
Working papers from Banque de France
In RBC models, “disaster risk shocks” reproduce countercyclical risk premia but generate an increase in consumption along the recession and asset price fall, through their effects on agents’ preferences (Gourio, 2012). This paper offers a solution to this puzzle by developing a New Keynesian model with such a small but time-varying probability of “disaster”. We show that price stickiness, combined with an elasticity of intertemporal substitution smaller than unity, restores procyclical consumption and wages, while preserving countercyclical risk premia, in response to disaster risk shocks. The mechanism then provides a rationale for discount factor first- and second-moment (“uncertainty”) shocks.
Keywords: disaster risk; rare events; uncertainty; Epstein-Zin-Weil preferences; asset pricing; DSGE models; New Keynesian models; business cycles; risk premium (search for similar items in EconPapers)
JEL-codes: D81 D90 E20 E31 E32 E44 G12 Q54 (search for similar items in EconPapers)
Pages: 64 pages
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: Track citations by RSS feed
Downloads: (external link)
https://publications.banque-france.fr/sites/defaul ... avail-614-2016_0.pdf (application/pdf)
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 (2015)
Working Paper: Disaster risk and preference shifts in a New Keynesian model (2015)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:614
Access Statistics for this paper
More papers in Working papers from Banque de France Banque de France 31 Rue Croix des Petits Champs LABOLOG - 49-1404 75049 PARIS. Contact information at EDIRC.
Bibliographic data for series maintained by Michael brassart ().