Risky Business Cycles

Susanto Basu, Giacomo Candian, Ryan Chahrour and Rosen Valchev

No 28693, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We identify a shock that explains the bulk of fluctuations in the equity risk premium, 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 a reallocation away from full-time labor positions, and towards part-time and flexible contract workers. We explain the data using a novel real model with labor market frictions and fluctuations in risk appetite. Since safer factors of production have lower marginal products in equilibrium, a “flight-to-safety” from riskier to safer factors precipitates a macroeconomic recession.

JEL-codes: E24 E32 G12 (search for similar items in EconPapers)
Date: 2021-04
New Economics Papers: this item is included in nep-cwa, nep-dge, nep-mac and nep-ore
Note: EFG ME
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Citations: View citations in EconPapers (7)

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Working Paper: Risky Business Cycles (2024)
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