American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
Disasterization: A Simple Way to Fix the Asset Pricing Properties of Macroeconomic Models
American Economic Review
(pp. 406–09)
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.Citation
Gabaix, Xavier. 2011. "Disasterization: A Simple Way to Fix the Asset Pricing Properties of Macroeconomic Models." American Economic Review 101 (3): 406–09. DOI: 10.1257/aer.101.3.406JEL Classification
- E32 Business Fluctuations; Cycles
- E44 Financial Markets and the Macroeconomy
- G12 Asset Pricing; Trading volume; Bond Interest Rates