American Economic Review Vol. 101 No. 3 2011
Disasterization: A Simple Way to Fix the Asset Pricing Properties of Macroeconomic Models
Abstract
A central difficulty in economics is to create a model with both good business cycle properties and asset pricing properties. I show how to solve this difficulty by a simple portable modeling device: the “disasterization” of models. Take an economy with good business cycle properties and create a new, “disasterized” economy, which is essentially identical to the original one except that disasters can destroy part of the capital stock and productivity. In such a disasterized economy, asset prices exhibit high and volatile risk premia, but macro variables remain unchanged. Perturbations of this benchmark allow for feedback from finance to macro.
- DOI
- 10.1257/aer.101.3.406
- Volume
- 101
- Issue
- 3
- Pages
- 406-409
- Language
- en
- Sources
- bibtex:phds-export.bib crossref openalex