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Trend Growth Shocks and Asset Prices

Author

Listed:
  • Nam Gang Lee

    (Economic Research Institute, Bank of Korea)

Abstract
This paper addresses the link between shocks to productivity trend growth and long-run consumption risk in a production economy model with recursive utility. Quantifying trend growth shocks, I find that persistent fluctuations in trend growth are the key driver of sizable long-run consumption risk. I compare this result to two conventional assumptions on a productivity process: 1) a deterministic trend with a cycle and 2) a random walk with drift. Persistent trend growth shocks generate larger long-run consumption risk than both highly persistent cycle shocks and random walk shocks. As a result, agents in the face of the trend growth shocks tend to save more and demand a higher equity premium. In addition, fluctuations in aggregate productivity growth is largely attributable to movements in trend growth.

Suggested Citation

  • Nam Gang Lee, 2019. "Trend Growth Shocks and Asset Prices," Working Papers 2019-4, Economic Research Institute, Bank of Korea.
    • Handle: RePEc:bok:wpaper:1904
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Long-run consumption risk; stochastic trend growth; equity premium; production economy; exact initial Kalman filter;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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