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Habit Persistence, Asset Returns, and the Business Cycle
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Journal Article
Habit Persistence, Asset Returns, and the Business Cycle
2001
Overview
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.
Publisher
American Economic Association
Subject
