Disaster Risk and Preference Shifts in a New Keynesian Model
Marlène Isoré () and
Urszula Szczerbowicz ()
Working Papers from CEPII research center
This paper analyzes the effects of a change in a small but time-varying “disaster risk” à la Gourio (2012) in a New Keynesian model. Real business cycle models featuring disaster risk have been successful in replicating observed moments of equity premia, yet their macroeconomic responses are highly sensitive to the chosen value of the elasticity of intertemporal substitution (EIS). In particular, we show here that an increase in the probability of disaster causes a recession only when imposing an EIS larger than unity, which may be arbitrarily large. Nevertheless, we also find that incorporating sticky prices allows to conciliate recessionary effects of the disaster risk with a plausible value of the EIS. The disaster risk shock causes endogenous shifts in preferences which provide a rationale for discount factor first- (Christiano et al., 2011) and second- (Basu and Bundick, 2014) moment shocks.
Keywords: disaster risk; rare events; uncertainty; asset pricing; DSGE models; new Keynesian models; business cycles (search for similar items in EconPapers)
JEL-codes: D81 D90 E20 E31 E32 E44 G12 Q54 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge and nep-mac
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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 (2016)
Working Paper: Disaster risk and preference shifts in a New Keynesian model (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:cii:cepidt:2015-16
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