Habit Persistence, Asset Returns, and the Business Cycle
Lawrence J. Christiano, and
Jonas D. M. Fisher. 2001. "Habit Persistence, Asset Returns, and the Business Cycle."
American Economic Review,
Two modifications are introduced into the standard real-business-cycle model: habit preferences and a two-sector technology with limited intersectoral factor mobility. The model is consistent with the observed mean risk-free rate, equity premium, and Sharpe ratio on equity. In addition, its business-cycle implications represent a substantial improvement over the standard model. It accounts for persistence in output, comovement of employment across different sectors over the business cycle, the evidence of "excess sensitivity" of consumption growth to output growth, and the "inverted leading-indicator property of interest rates," that interest rates are negatively correlated with future output.
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Boldrin, Michele (U MN)
Christiano, Lawrence J. (Northwestern U)
Fisher, Jonas D. M. (Federal Reserve Bank of Chicago)
E32: Business Fluctuations; Cycles
E44: Financial Markets and the Macroeconomy
O41: One, Two, and Multisector Growth Models