Extreme inflation and time-varying consumption growth

Ilya Dergunov, Christoph Meinerding and Christian Schlag

No 16/2019, Discussion Papers from Deutsche Bundesbank

Abstract: In a parsimonious regime switching model, expected consumption growth varies over time. Adding in ation as a conditioning variable, we uncover two states in which expected consumption growth is low, one with high and one with negative expected in ation. Embedded in a general equilibrium asset pricing model with learning, these dynamics replicate the observed time variation in stock return volatilities and stock-bond return correlations. Furthermore, they provide an alternative way to come up with a measure of time-varying disaster risk in the spirit of Wachter (2013). Our findings imply that both the disaster and the long-run risk paradigm can be extended towards explaining movements in the stock-bond return correlation.

Keywords: long-run risk; inflation; recursive utility; filtering; disaster risk (search for similar items in EconPapers)
JEL-codes: E31 E44 G12 (search for similar items in EconPapers)
Date: 2019
New Economics Papers: this item is included in nep-bec, nep-mac, nep-ore and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bubdps:162019

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