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American Economic Review: Vol. 102 No. 6 (October 2012)

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Disaster Risk and Business Cycles

Article Citation

Gourio, François. 2012. "Disaster Risk and Business Cycles." American Economic Review, 102(6): 2734-66.

DOI: 10.1257/aer.102.6.2734

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)

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Authors

Gourio, François (Boston U)

JEL Classifications

E13: General Aggregative Models: Neoclassical
E32: Business Fluctuations; Cycles
E44: Financial Markets and the Macroeconomy
G32: Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill


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