Title : Trend Growth Shocks and Asset Prices
Author : Nam Gang Lee(BOK)
This paper addresses the link between shocks to productivity trend growth and long-run consumption risk in a production economy model with recursive utility. Quantifying trend growth shocks, I find that persistent fluctuations in trend growth are the key driver of sizable long-run consumption risk. I compare this result to two conventional assumptions on a productivity process: 1) a deterministic trend with a cycle and 2) a random walk with drift. Persistent trend growth shocks generate larger long-run consumption risk than both highly persistent cycle shocks and random walk shocks. As a result, agents in the face of the trend growth shocks tend to save more and demand a higher equity premium. In addition, fluctuations in aggregate productivity growth is largely attributable to movements in trend growth.