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Risky Business Cycles

Susanto Basu (), Giacomo Candian (), Ryan Chahrour and Rosen Valchev

No 1029, Boston College Working Papers in Economics from Boston College Department of Economics

Abstract: We identify a shock that explains the bulk of fluctuations in equity risk premia, and show that the shock also explains a large fraction of the business-cycle comovements of output, consumption, employment, and investment. Recessions induced by the shock are associated with reallocation away from full-time permanent positions, towards part-time and flexible contract workers. A real model with labor market frictions and fluctuations in risk appetite can explain all of these facts, both qualitatively and quantitatively. The size of risk-driven fluctuations depends on the relationship between the riskiness and productivity of different stores of value: if safe savings vehicles have relatively low marginal products, then a flight to safety will drive a larger aggregate contraction.

Keywords: Business Cycles; Risk Premia; Uncertainty (search for similar items in EconPapers)
JEL-codes: E24 E32 (search for similar items in EconPapers)
Date: 2021-04-07
New Economics Papers: this item is included in nep-cwa, nep-dge, nep-fdg, nep-mac and nep-ore
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