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Durable Goods, Inflation Risk, and Equilibrium Asset Prices

Bjørn Eraker¹; Ivan Shaliastovich²; Wenyu Wang³

¹ University of Wisconsin System · ² University of Pennsylvania · ³ Indiana University

High expected inflation is known to predict low future real growth. We show that, relative to nondurable goods sectors of the economy, such predictability is significantly more pronounced in durable sectors. Consistent with this macroeconomic evidence, the equity returns of durable goods-producing firms have a larger negative exposure to expected inflation risks. We estimate a two-good recursive utility model that features persistent growth fluctuations and inflation nonneutrality for durable and nondurable consumption. Our model can quantitatively account for the levels and volatilities of bond and equity prices, and correlations of equity returns with bond returns and with expected inflation. Received January 25, 2012; accepted July 13, 2015 by Editor Geert Bekaert.

DOI

10.1093/rfs/hhv049

Volume

29 (1)

Pages

193-231

Language

en

Export

BibTeX

Sources

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