For debt, asset pricing is relatively simple, as cash flows to the owner are contractually fixed. Firmspecific capital, nominal rigidities and the business cycle. Nominal rigidities and asset pricing kit econstartseite. A challenge has been to develop a model in which monetary policy shocks have. Thus, our results suggest that if nominal rigidities are needed to match stylized facts of goods and labor markets, then demand shocks are needed to generate large risk premia, a. Nominal rigidities and the dynamic effects of a shock to monetary policy lawrence j. Nominal rigidities versus real rigidities nominal rigidities are said to exist when nominal prices and wages do not change in the face of conditions that call for their change. We find that nominal rigidities take the form of inertia in reference prices and costs, defined as the most common prices and costs within a given quarter. Intermediate macroeconomics university of notre dame. Also, investors are likely to require compensation for holding securities that are illiquid, and therefore embody a risk that they will be dif. In the other event, low inflation is desirable, as it reduces the costs. In recent quantitative treatments, however, the real e ects of nominal price stickiness do not last much longer than the average duration of a price.
Asset pricing wikibooks, open books for an open world. As you have seen in earlier units, this will lead to keynesian unemployment. Asset pricing, professor doron avramov, finance department, hebrew university of jerusalem, israel empirical evidence shows that. Aug 12, 2014 this paper examines the asset pricing implications of nominal rigidities.
Christiano martin eichenbaum jesper linde november 28, 2004 abstract macroeconomic and microeconomic data paintcon. Nominal rigidities and asset pricing semantic scholar. Introduction to asset pricing theory the theory of asset pricing is concerned with explaining and determining prices of. This has important implications for exchange rate passthrough and optimal exchange rate policy. Merging confidential product price data at the firm level with stock returns, i document that the premium for stickyprice firms is a robust feature of the data and is not driven. This paper examines the assetpricing implications of nominal rigidities. A large literature seeks to provide microfoundations of price setting for macro models. Theory through applications by russell cooper, andrew john the saylor foundation, 20 macroeconomics. Samuelson award for scholarly writing on lifelong financial security, john cochranes asset pricing now appears in a revised edition that unifies and brings the science of asset pricing up to date for advanced students and professionals. A quartet of asset pricing models in nominal and real. Quantitatively, nominal rigidities and permanent productivity shocks increase the equity premium relative to comparable real business cycle models. This pricing equation is general in at least two senses. One principal research in macroeconomics is concerned with the importance of nominal rigidities. In this paper, we study a quartet of asset pricing models in both nominal and real economies.
Nominal rigidities versus real rigidities, managerial. The seminal article by bils and klenow 2004 argues that prices are quite. November 21, 20 abstract this paper examines the assetpricing implications of nominal rigidities. Duffies dynamic asset pricing theory is not the best book to start. We use international price data and exchange rate shocks to evaluate the importance of real rigidities in price setting.
An intertemporal asset pricing model with stochastic consumption and investment opportunities douglas t. The effects of nominal rigidities on expected excess returns can be understood by the impact of these rigidities on the pricing kernel, output, labor, and production markups. The oneperiod real interest rate is closely related to the conditional mean of the sdf, conditioning on information available at the start of the period. While the relation between sticky prices and asset pricing has. An accountingbased characteristic model for asset pricing. But unemployment can also come about because of certain real rigidities in the economy. Asset prices, nominal rigidities, and monetary policy sciencedirect. Merging unique productprice data at the firm level with stock returns, i document that the premium for stickyprice firms is a robust feature of the data and varies substantially. Explaining international comovements of output and asset returns.
We bring the two literatures together to shed light on this question. It is almost impossible to begin to understand nominal rigidities in the walrasian framework where all agents are price takers. Intermediate macroeconomics julio gar n claremont mckenna college robert lester colby college eric sims. Explaining international comovements of output and asset. The book has room for improvement, and i believe back is working on a 2nd edition. Nominal rigidities and asset pricing michael weber march 27 2015 abstract this paper examines the asset pricing implications of nominal rigidities. Nominal rigidities, asset returns, and monetary policy. In this respect, nominal rigidities can improve the ability of open economy models to explain the high crosscountry correlations of output, consumption and asset returns observed in the data. Nominal rigidities and asset pricing michael weber. Reference prices and nominal rigidities, eichenbaum, jaimovich, and re.
The capital asset pricing model capm cannot explain. Nominal rigidities versus real rigidities, managerial economics. We perform the analysis under alternative pricing assumptionsproducer or local currency pricing, along with nominal wage. The paper presents an accounting framework for identifying characteristics that indicate expected returns. Equity pricing new keynesian models with nominal rigidities. Fred bergsten senior fellow at the peterson institute for international economics and robert solow professor of economics emeritus at mit. Apr 04, 2017 open economy macroeconomics ebook written by martin uribe, stephanie schmittgrohe. The closed and open economy literatures work on estimating real rigidities, but in parallel.
This dissertation applies nominal rigidities in closed and openeconomy models to study issues on firms pricing decisions, optimal monetary policy in a financially constrained economy, and the choice of exchange rate regime in the presence of transfer problem. Economic fluctuations and growth, monetary economics. Nominal rigidities and asset pricing by michael weber ssrn. Pdf inflation, relative prices and nominal rigidities. We include chapters on the basics of banking and bank runs, as well as a. In terms of theoretical microfoundations, one way of obtaining real e ects of nominal shocks is, of course, nominal price rigidity. Cochrane traces the pricing of all assets back to a single ideaprice. But, currently, there is no other text better than back. It is the most uptodate text on the canonical asset pricing theory.
I find that firms that adjust their product prices infrequently earn a crosssectional return premium of more than 4% per year. Nominal price rigidities the empirical plausibility of monetary business cycle models depends critically on the nature of nominal rigidities in goods markets. Huw dixon new keynesian economics, nominal rigidities. Demand elasticities, nominal rigidities and asset prices. Essays on nominal rigidities, financial constraints and. Chari, kehoe and mcgrattan 2000 examine timedependent models. Firmspecific capital, nominal rigidities and the business. Costis skiadas develops in depth the fundamentals of arbitrage pricing, meanvariance analysis, equilibrium pricing, and optimal consumptionportfolio choice in discrete settings, but with emphasis. Open economy macroeconomics by martin uribe, stephanie. Firms that adjust their product prices infrequently earn a return premium of 4% per year. This chapter discusses the three lines of research used in assessing basic models of fluctuations in competitive markets, namely research with the use of dynamic stochastic general equilibrium models, a typical sunspot model, and a combination of keynesian theory, the samuelson destabilizing accelerator, and the philips curve. This paper derives explicitly an equity pricing relationship in a simple new keynesian model.
Huw dixon new keynesian economics, nominal rigidities and. Dynamic asset pricing theory provisional manuscript. If there is a shortterm riskless real asset f with a payoff of one. Other books whose treatments overlap with some of the topics treated here include avelleneda and laurence 1999, bjork 1998, dana and jeanblanc 1998, demange and rochet 1992, dewynne and wilmott 1994. Here, we extend the standard menucost model with heterogeneous rms by adding a working capital constraint. This relationship is used to study the equity pricing implications of new keynesian models. An overview of asset pricing models andreas krause university of bath school of management phone.
Macroeconomists are increasingly using micro data sets to measure how frequently prices change. Download for offline reading, highlight, bookmark or take notes while you read open economy macroeconomics. Merging unique productprice data at the firm level with stock returns, i document that the premium for stickyprice firms is a robust feature of the data and varies substantially over the business cycle. Objectives contribute towards construction of a dynamic general equilibrium model useable for policy analysis resolve apparent conflict between macro and. Nominal rigidities here amplify the effect of demand shocks such as the proposed monetary policy shock. This paper analyzes this question from the vantage point of equilibrium determinacy. Economic fluctuations and growth, monetary economics we present a model embodying moderate amounts of nominal rigidities which accounts for the observed inertia in inflation and. We show that even when the exchange rate cannot be devalued, a small set of conventional fiscal instruments can robustly replicate the real allocations attained under a nominal exchange rate devaluation in a dynamic new keynesian open economy environment. Costis skiadas develops in depth the fundamentals of arbitrage pricing, meanvariance analysis, equilibrium pricing, and optimal consumption. Cochrane traces the pricing of all assets back to a single ideaprice equals expected discounted payoffthat captures the. Find materials for this course in the pages linked along the left.
Campbells model uses a representative agent framework, and hence, it shares the weaknesses of the consumption c a pm and euler equation methods that were developed in the 1980s to test intertemporal assetpricing models. Pdf in a general real business cycle model, we derive a pricing. Second, it does not depend on any specific assumptions about the properties of asset prices, and therefore does not rely on any particular asset pricing model. First, it holds for any asset, including stocks, bonds, real estate property, etc. It explains that the dynamic stochastic general equilibrium models. Asset prices, nominal rigidities, and monetary policy. We include chapters on the basics of banking and bank runs, as well as a chapter that delves into the money supply process in more detail. Nominal rigidities and the dynamic effects of a shock. Uc berkeley no 53, 2014 meeting papers from society for economic dynamics abstract. Thus, our results suggest that if nominal rigidities are needed to match stylized facts of goods and labor markets, then demand shocks are needed to generate large risk premia, a stylized fact of asset prices. Nominal rigidities play a central role in macroeconomics to explain. An intuitive graphical treatment of optimal policy under complete markets, contrasting pcp lcp and dollar pricing nominal rigidities in the form of one period preset prices is provided in g corsetti and p pesenti the simple geometry of transmission and stabilization in closed and open economies, nber international seminar on macroeconomics 2007, pages 65116 national bureau of economic. However, the model only generates one seventh of the observed equity premium, and the effects of monetary policy on asset returns are small.
Uc berkeley no 53, 2014 meeting papers from society for economic dynamics. This paper examines the asset pricing implications of nominal rigidities. Theory through applications will assist you in increasing students economic literacy both by developing their aptitude for economic thinking and by presenting key insights about economics that every educated individual should know. Michael weber additional contact information michael weber. This \wicksellian framework for thinking about policy is now the dominant. I find that firms that adjust their product prices infrequently earn a crosssectional. We present a model embodying moderate amounts of nominal rigidities which accounts for the observed inertia in inflation and persistence in output.
Reference books analysing the dynamics of asset prices and their. Asset pricing at the millennium harvards dash harvard university. The role of money and nominal rigidities wp9984 created date. I i nd that new keynesian models suier from the same asset pricing shortcomings as more traditional rbc versions and that this can be attributed to the presence of nominal rigidities. We would like to show you a description here but the site wont allow us. The asset prices we discuss would include prices of bonds and stocks, interest rates, exchange rates, and derivatives of all these underlying. Nominal rigidities create operational leverage in rms and therefore create a role for demand elasticity to matter for rm fundamentals and crosssectional asset pricing.
Firmspecific capital, nominal rigidities and the business cycle dave altig lawrence christiano martin eichenbaum jesper linde. A central assumption of open economy macro models with nominal rigidities relates to the currency in which goods are priced, whether there is socalled producer currency pricing or local currency pricing. Asset pricing implications of a new keynesian model. We analyze the implications of nominal rigidities and monetary policy on expected asset returns of production claims, focusing on claims on all future output and profits. A model links expected returns to expected earnings and earnings growth, so a characteristic indicates expected returns if it indicates expected earnings and earnings growth that the market prices as being at risk. However, nominal rigidities can only be properly understood in a theoretical framework with price or wage making agents. He was chief economist at the international monetary fund from 2008 to 2015. Reference prices, costs, and nominal rigidities by martin eichenbaum, nir jaimovich, and sergio rebelo we assess the importance of nominal rigidities using a new weekly scanner dataset.
38 1149 187 1250 1548 654 576 298 1136 1190 1359 445 1447 1304 514 858 1278 1114 1570 402 1444 1045 1500 1330 249 15 738 1246 164 886 1449 998 411 1278 59