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The risk premium channel and long-term growth

Malte D. Schumacher and Dawid Żochowski

No 2114, Working Paper Series from European Central Bank

Abstract: We study a quantitative DSGE model linking a state of the art asset pricing framework a la Kung and Schmid (2015) with a constraint on leverage as in Gertler and Kiyotaki a (2010). We show that a mere increase in the probability of firms being financially constrained leads to an increase in risk premia. Even for a small adverse shock to productivity a drop in asset valuation restrains firms from outside financing and by that induces a persistent low growth environment. In our framework a constraint on leverage induces countercyclical risk premia in equity markets even when it does not bind. JEL Classification: D53, G01, G12

Keywords: asset pricing; endogenous growth; financial accelerator; risk premia (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge and nep-fdg
Date: 2017-12
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20172114

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