Financial Business Cycles

Sebastian Di Tella and Robert Hall ()
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Sebastian Di Tella: Stanford

No 1101, 2019 Meeting Papers from Society for Economic Dynamics

Abstract: We propose an equilibrium model of business cycles driven by risk-premium shocks that act like demand shocks for investment. There are no nominal rigidities. Instead, the main short-run friction is that capital and labor cannot be immediately reallocated. This creates a countercyclical labor wedge that depresses employment, investment, and consumption. We model risk-premium shocks in a general way that nests most asset pricing theories, but treat it as an exogenous residual and discipline it with asset- pricing data. We calibrate the model using sectoral employment data, and show that risk-premium shocks create quantitatively realistic business cycles.

Date: 2019
New Economics Papers: this item is included in nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed019:1101

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