Pricing Assets In A Perpetual Youth Model

Download or read book Pricing Assets in a Perpetual Youth Model written by Roger E. A. Farmer and published by . This book was released on 2018 with total page 35 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper constructs a general equilibrium model where asset price fluctuations are caused by random shocks to beliefs about the future price level that reallocate consumption across generations. In this model, asset prices are volatile, and price-earnings ratios are persistent, even though there is no fundamental uncertainty and financial markets are sequentially complete. I show that the model can explain a substantial risk premium while generating smooth time series for consumption. In my model, asset price fluctuations are Pareto inefficient and there is a role for treasury or central bank intervention to stabilize asset price volatility.