Macroeconomic Implications of Asset Prices

Mikhail Golosov and Thomas Winberry
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Thomas Winberry: University of Chicago

No 214, 2018 Meeting Papers from Society for Economic Dynamics

Abstract: Modern DSGE models do a good job at accounting for the dynamics of aggregate quantities. However, this success is built on a fundamental tension: asset prices play an allocative role in determining aggregate quantities, but are completely at odds with the data. We study the implications of asset pricing facts for the understanding of quantity dynamics. To do so, we estimate a stochastic discount factor from asset pricing data and compute the behavior of a neoclassical production sector given this SDF. We have two main preliminary results. First, over 99% of the variation in aggregate quantities can be accounted for using the risk-free rate alone. Hence, risk premia - which are crucial for matching asset pricing data - are unimportant in determining quantities. Second, large adjustment frictions are necessary to match quantity dynamics. The reason is that the risk-free rate is negatively correlated with productivity in the data, so it does not dampen the response of firms to productivity shocks. We explore the implications of these findings for a range of economic issues.

Date: 2018
New Economics Papers: this item is included in nep-dge and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed018:214

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