Habit persistence, asset returns, and the business cycle

Michele Boldrin*, Lawrence J. Christiano, Jonas D.M. Fisher

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

384 Scopus citations

Abstract

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.

Original languageEnglish (US)
Pages (from-to)149-166
Number of pages18
JournalAmerican Economic Review
Volume91
Issue number1
DOIs
StatePublished - Mar 2001

ASJC Scopus subject areas

  • Economics and Econometrics

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