American Economic Review· 2012Q1
Disaster Risk and Business Cycles
- 772citations
- Q1SCImago
- 2012year
Short summary
A real business cycle model incorporating a small risk of economic disaster (e.g., Great Depression) predicts that increased disaster risk lowers employment, output, investment, stock prices, and interest rates, while raising expected returns on risky assets.
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Key points
- Introduces a real business cycle model with a small risk of economic disaster.
- Increased disaster risk is shown to decrease employment, output, investment, stock prices, and interest rates.
- Higher disaster risk is associated with an increase in the expected return on risky assets.
- The model successfully replicates observed data on economic quantities, asset prices, and their relationships.
AI-generated from the title and abstract; the full text is not read.
Abstract
Motivated by the evidence that risk premia are large and countercyclical, this paper studies a tractable real business cycle model with a small risk of economic disaster, such as the Great Depression. An increase in disaster risk leads to a decline of employment, output, investment, stock prices, and interest rates, and an increase in the expected return on risky assets. The model matches well data on quantities, asset prices, and particularly the relations between quantities and prices, suggesting that variation in aggregate risk plays a significant role in some business cycles. (JEL E13, E32, E44, G32)
The authors' abstract, as published at the source. American Economic Review, 2012 · DOI ↗
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Field: General Economics, Econometrics and Finance
General Economics, Econometrics and FinanceEconomics, Econometrics and Finance