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Trend Growth Shocks and Asset Prices

Nam Gang Lee ()
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Nam Gang Lee: Economic Research Institute, Bank of Korea

No 2019-4, Working Papers from Economic Research Institute, Bank of Korea

Abstract: This paper addresses the link between shocks to productivity trend growth and long-run consumption risk in a production economy model with recursive utility. Quantifying trend growth shocks, I find that persistent fluctuations in trend growth are the key driver of sizable long-run consumption risk. I compare this result to two conventional assumptions on a productivity process: 1) a deterministic trend with a cycle and 2) a random walk with drift. Persistent trend growth shocks generate larger long-run consumption risk than both highly persistent cycle shocks and random walk shocks. As a result, agents in the face of the trend growth shocks tend to save more and demand a higher equity premium. In addition, fluctuations in aggregate productivity growth is largely attributable to movements in trend growth.

Keywords: Long-run consumption risk; stochastic trend growth; equity premium; production economy; exact initial Kalman filter (search for similar items in EconPapers)
JEL-codes: E21 E23 E30 G12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-mac and nep-upt
Date: 2019-01-25
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http://papers.bok.or.kr/RePEc_attach/wpaper/english/wp-2019-4.pdf Working Paper, 2019 (application/pdf)

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