nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2019‒09‒16
twenty-two papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Mismatch Cycles By Isaac Baley; Ana Figueiredo; Robert Ulbricht
  2. Trade and labour market institutions: A tale of two liberalizations By Alessandro Ruggieri
  3. Illiquid Financial Markets and Monetary Policy By Athanasios Geromichalos; Juan M. Licari; Jose Suarez-Lledo
  4. Revisiting the progressive consumption tax: A business cycle perspective By Strehl, Wolfgang
  5. Public Debt, Redistribution, and Growth By Axelle Ferriere; Dominik Sachs; Philipp Grubener
  6. How Important Is Health Inequality for Lifetime Earnings Inequality? By Roozbeh Hosseini; Kai Zhao; Karen Kopecky
  7. Worker Heterogeneity and the Asymmetric Effects of Minimum Wages By Jose Luis Luna-Alpizar
  8. Search Complementarities, Aggregate Fluctuations,and Fiscal Policy By Jesus Fernandez-Villaverde; Federico Mandelman; Yang Yu; Francesco Zanetti
  9. Ramsey Optimal Policy in the New-Keynesian Model with Public Debt By Jean-Bernard Chatelain; Kirsten Ralf
  10. Advancing Inclusive Growth in Cambodia By Niels-Jakob H Hansen; Albe Gjonbalaj
  11. Time Variation in Lifecycle Consumption and Housing Wealth By Yunus Aksoy; Henrique S. Basso; Carolyn St Aubyn
  12. FIR-GEM: A SOE-DSGE Model for fiscal policy analysis in Ireland By Varthalitis, Petros
  13. Behavioral learning equilibria in the New Keynesian model By Cars Hommes; Kostas Mavromatis; Tolga Ozden; Mei Zhu
  14. Optimal Inflation Targeting in a Dual-Exchange Rate Oil Economy By Hossein Tavakolian; Hamed Ghiaie
  15. The 2008 US Auto Market Collapse By Bill Dupor; M. Saif Mehkari; Rong Li; Yi-Chan Tsai
  16. Does my model predict a forward guidance puzzle? By Gibbs, Christopher G.; McClung, Nigel
  17. A Macroprudential Theory of Foreign Reserve Accumulation By Fernando Arce; Julien Bengui; Javier Bianchi
  18. Oil price shocks, monetary policy and current account imbalances within a currency union By Ansgar Belke; Timo Baas
  19. Durables and Lemons: Private Information and the Market for Cars By Richard Blundell; Ran Gu; Soren Leth-Petersen; Hamish Low; Costas Meghir
  20. Multiple Applications, Competing Mechanisms, and Market Power By James Albrecht; Xiaoming Cai; Pieter A. Gautier; Susan Vroman
  21. Business Cycle during Structural Change: Arthur Lewis' Theory from a Neoclassical Perspective By Kjetil Storesletten; Bo Zhao; Fabrizio Zilibotti
  22. Parameter Learning in Production Economies By Mykola Babiak; Roman Kozhan

  1. By: Isaac Baley (Universitat Pompeu Fabra); Ana Figueiredo (Erasmus School of Economics); Robert Ulbricht (Boston College)
    Abstract: This paper studies the dynamics of skill mismatch over the business cycle. We build a tractable directed search model, in which workers differ in skills along multiple dimensions and sort into jobs with heterogeneous skill requirements along those dimensions. Skill mismatch arises due to information and labor market frictions. Estimated to the U.S., the model replicates salient business cyclic properties of mismatch. We show that job transitions in and out of bottom job rungs, combined with career mobility of workers, are important to account for the empirical behavior of mismatch. The model suggests significant welfare costs associated with mismatch due to learning frictions.
    Keywords: Business cycles, cleansing, multidimensional sorting, search-and-matching, skill mismatch, sullying
    JEL: E24 E32 J24 J64
    Date: 2019–08–21
  2. By: Alessandro Ruggieri
    Abstract: In this paper I study how labour market institutions at the time of a trade reform determine the dynamic response of unemployment. I first document that for a large group of developing countries (1) unemployment increases on average following a trade reform, (2) there are significant cross-country differences in unemployment response, and (3) cross-country variation in the labour market institutions in place at the time of the reform can account for the observed unemployment changes. I interpret this evidence through the lens of a model of international trade, featuring heterogeneous firms, endogenous industry dynamics and search and matching frictions and a dual labour market. I estimate the model to match the pre-liberalization firm dynamic in Colombia and Mexico, two countries that differed by the labour regulations in place at the time of trade liberalization, and I characterize numerically the full transition path towards the new steady state. I show that the dynamic response of unemployment to a reduction in trade costs is non-linear across different combinations of labour market institutions in place at the time of the reform. Consistent with the cross-country evidence, the response is stronger and more persistent when the firing costs are lower and the statutory minimum wage and unemployment benefits are larger. Those three institutions account for up to 46 percent of the average unemployment response in the case of Mexico, and up to 41 percent in the case of Columbia.
    Keywords: Trade reform, labor market institutions, unemployment, transitional dynamics, gains from trade.
    Date: 2019
  3. By: Athanasios Geromichalos; Juan M. Licari; Jose Suarez-Lledo
    Abstract: This paper analyzes the role of money in asset markets characterized by search frictions. We develop a dynamic framework that brings together a model for illiquid financial assets `a la Duffie, Garleanu, and Pedersen, and a search-theoretic model of monetary exchange `a la Lagos and Wright. The presence of decentralized financial markets generates an essential role for money, which helps investors re-balance their portfolios. We provide conditions that guarantee the existence of a monetary equilibrium. In this case, asset prices are always above their fundamental value, and this differential represents a liquidity premium. We are able to derive an asset pricing theory that delivers an explicit connection between monetary policy, asset prices, and welfare. We obtain a negative relationship between inflation and equilibrium asset prices. This key result stems from the complementarity between money and assets in our framework.
    Date: 2019–09
  4. By: Strehl, Wolfgang
    Abstract: This paper revisits the personal expenditure tax (PET), the most prominent version of a progressive consumption tax. The PET has a long intellectual tradition in economics, and the merits and demerits of this alternative to the personal income tax have been discussed at length. What has been missing in the literature so far, however, is a systematic account of its effect on the business cycle. This paper therefore seeks to add to the theoretical literature on the PET and the wider literature on automatic fiscal stabilizers by analyzing the PET's macroeconomic properties in a modern business cycle model. To this effect, the paper introduces a highly stylized PET into a standard New Keynesian DSGE model, derives a log-linear version of the model, and draws a comparison with the existing income tax. The model simulations show that the two tax systems lead to quite different macroeconomic dynamics. Furthermore, it is found that the PET yields welfare gains, relative to the income tax, for all the demand shocks considered. The PET yields welfare losses, however, under a supply shock.
    Keywords: Progressive Taxation,Consumption Taxation,Business Cycles,DSGEModel,Welfare Analysis
    JEL: E2 E3 E32 E62 E52
    Date: 2019
  5. By: Axelle Ferriere (PSE); Dominik Sachs (LMU Munich); Philipp Grubener (EUI)
    Abstract: We study the implications of economic growth for the generosity and the financing of the welfare state. In a simple model without savings, we first derive some benchmark conditions under which both the generosity of the welfare state and tax progressivity are independent of the level of economic development. This homothetic benchmark extends to the case of external public debt if the interest rate equals a threshold which depends not only on preference parameters, but also on the growth rate. When growth rates are high and interest rates are be- low this threshold, governments of growing economies should issue public debt to finance a generous welfare state initially; tax progressivity will then increase eventually to finance the service of the debt. We show that this force is quantitatively large. Finally, homotheticity also extends to internal savings between the government and the private agents, as long as there is no initial wealth inequality across agents: the optimal welfare state and tax progressivity are constant and the endogenous interest rate is such that there is no savings. Next, we break homotheticity by introducing subsistence levels. We analytically show that in autarky, positive subsistence levels imply a more generous welfare state at earlier stages of development, financed with more progressive taxes. When allowing for external borrowing, even at the interest rate threshold for which there is no motive for borrowing in the homothetic benchmark, subsistence levels translate into interesting dynamics. The welfare state should be more generous initially, but this should solely be financed with public debt. The standard tax smoothing result remains. With internal debt, the government should use public debt to finance an initially more generous welfare state. However, optimal tax progressivity initially increases. The increase in tax progressivity is desirable because it improves the terms of trade for the government. Finally, we study the effects of initial asset inequality. Preliminary analytical results suggest that wealth inequality generate a force for increasing tax progres- sivity to improve the terms of trade for the poor households. The magnitude of this price manipulation mechanism depends on initial and future growth.
    Date: 2019
  6. By: Roozbeh Hosseini (University of Georgia); Kai Zhao (University of Connecticut); Karen Kopecky (Federal Reserve Bank of Atlanta)
    Abstract: Health and earnings are positively correlated due to several reasons. First, individuals who are in poor health are significantly less likely to work than healthy individuals. Second, conditional on working, individuals in poor health work fewer hours on average. Third, individuals in poor health on average earn lower wages. We document these facts using an objective measure of health called a frailty index which we construct for PSID respondents. The frailty index measures the fraction of observable health deficits an individual has. In previous work, we documented that health, as measured by the frailty index, deteriorates more rapidly and has a larger increase in dispersion with age than self-reported health. It is also more persistent over the life-cycle. These facts put together suggest that health inequality over the life cycle may be an important driver of lifetime earnings inequality. To assess this claim we develop a model of the joint dynamics of health and earnings over the life cycle. Individuals in the model face health, productivity and employment risk, and optimally choose labor supply on both the intensive and extensive margins. Agents are partially insured against these risks through government-run disability insurance, means-tested social insurance, and social security programs. They face a dynamic process for frailty (health) that is estimated using the PSID data. The model is estimated using a method of moments. Targeted moments are constructed off distributions of wages, hours, and employment rates by frailty and age. These distributions are obtained from an auxiliary simulation model that is estimated using PSID data. We find that health inequality can account for a significant share of the variation in lifetime earnings among 70 year-olds. Most of this effect is due to that unhealthy individuals exit the labor force at much younger ages than healthy ones. We find that health inequality has a larger impact on earnings inequality than previous literature for two reason. One, our model is the first in this literature that allows health to impact earnings through all three margins: participation, hours, and wages (productivity). Two, previous literature measured health using self-reported health status, and thus understated the extent to which health deteriorates with age for some individuals and the increase in health dispersion with age.
    Date: 2019
  7. By: Jose Luis Luna-Alpizar
    Abstract: This paper explores the notion that minimum wages affect different lowskilled workers asymmetrically due to productivity differences. In a search model with worker heterogeneity, a rising minimum wage lowers the employment and labor force participation of the least productive workers by pricing them out of the market, while having the opposite effect on other low-skilled workers that remain hirable. CPS data supports these predictions; a rise in the minimum reduces the employment and labor force participation of teenagers with less than high school education, but has the opposite effect on prime-age workers with high school attainment. The calibrated model requires small firm surpluses to match these observations. If firm surplus is small due to high nonmarket activity values, a moderate rise in the minimum improves aggregate welfare even when the worker's bargaining weight is high.
    Keywords: minimum wages; search and matching; unemployment; worker heterogeneity;
    JEL: E24 J08 J38 J64 J68
    Date: 2019–05
  8. By: Jesus Fernandez-Villaverde (University of Pennsylvania); Federico Mandelman (Federal Reserve Bank of Atlanta); Yang Yu (Shanghai University of Finance and Economics); Francesco Zanetti (University of Oxford)
    Abstract: We develop a quantitative business cycle model with search complementarities in the inter-firm matching process that entails a multiplicity of equilibria. An active static equilibrium with strong joint venture formation, large output, and low unemployment can coexist with a passive static equilibrium with low joint venture formation, low output, and high unemployment. Changes in fundamentals move the system between the two static equilibria,generating large and persistent business cycle fluctuations. The volatility of shocks is important for the selection and duration of each static equilibrium. Sufficiently adverse shocks in periods of low macroeconomic volatility trigger severe and protracted downturns. The magnitude of government intervention is critical to foster economic recovery in the passive static equilibrium, while it plays a limited role in the active static equilibrium.
    Keywords: Aggregate fluctuations, strategic complementarities, macroeconomic volatility, government spending.
    JEL: C63 C68 E32 E37 E44 G12
    Date: 2019–09
  9. By: Jean-Bernard Chatelain (PSE - Paris School of Economics, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique); Kirsten Ralf (Ecole Supérieure du Commerce Extérieur - ESCE - International business school)
    Abstract: This paper compares Ramsey optimal policy for the new-Keynesian model with public debt with its .scal theory of the price level (FTPL) equilibrium. Both the fiscal theory of the price level and Ramsey optimal policy implies that a de.cit shock is instantaneously followed by an increase of in.ation and output gap. But each optimal policy parameters belongs in di¤erent sets with respect to FTPL. The optimal .scal rule parameter implies local stability of public debt dynamics ("passive fiscal policy"). The optimal Taylor rule parameter for in.ation is larger than one. The optimal Taylor rule parameter for output gap is negative, because of the intertemporal substitution e¤ect of interest rate on output gap. Both Taylor rule optimal parameters implies the local stability of inflation and output gap dynamics.
    Keywords: Fiscal theory of the Price Level,Ramsey optimal policy
    Date: 2019–09
  10. By: Niels-Jakob H Hansen; Albe Gjonbalaj
    Abstract: We evaluate the impact of fiscal reforms on growth and inequality in Cambodia using a calibrated general equilibrium model with heterogeneous agents (Peralta-Alva et al., 2018). Over the last two decades, Cambodia’s consumption inequality and poverty have declined. However, income inequality is higher, and large gaps remain between urban and rural residents. At the same time, domestic revenue mobilization has improved substantially, but collection of tax revenue is biased towards non-progressive sources. We use the model to evaluate the growth and inequality impact of reforms that increase infrastructure spending by raising (i) VAT, (ii) property tax, or (iii) personal income tax. We find that using property taxes delivers the largest increase in GDP and reduction in inequality. Reaping the gains from property taxation will however require additional investments in tax administration.
    Date: 2019–09–06
  11. By: Yunus Aksoy (Birkbeck, University of London); Henrique S. Basso (Banco de España); Carolyn St Aubyn (Birkbeck, University of London)
    Abstract: We document systematic and significant time variation in the profiles of lifecycle consumption expenditures in the US. Lifecycle consumption profiles have consistently become flatter through time. Pooling data across different periods to identify consumption profiles masks relevant time variation and may artificially generate the well known hump-shaped consumption age profile. We also identify the effect of perceived housing wealth on lifecycle consumption profiles. Housing influenced lifecycle consumption particularly from 2006 onwards and for older households. We propose mechanisms that may account for the estimated results employing an overlapping generations model with perceived housing wealth and time varying borrowing constraints
    Keywords: Age profile of Consumption, Structural Trends, House Prices
    JEL: E21 J11
    Date: 2019–07
  12. By: Varthalitis, Petros
    Date: 2019
  13. By: Cars Hommes; Kostas Mavromatis; Tolga Ozden; Mei Zhu
    Abstract: We introduce the concept of behavioral learning equilibrium (BLE) into a high dimensional linear framework and apply it to the standard New Keynesian model. For each endogenous variable, boundedly rational agents use a simple, but optimal AR(1) forecasting rule with parameters consistent with the observed sample mean and autocorrelation of past data. The main contributions of our paper are fourfold: (1) we derive existence and stability conditions of BLE in a general linear framework, (2) we provide a general method for Bayesian likelihood estimation of BLE, (3) we estimate the baseline NK model based on U.S. data and show that the relative model fit is better under BLE than REE, (4) we analyze optimal monetary policy under BLE and show that it differs from REE. In particular, we find that the transmission channel of monetary policy is stronger under BLE at the estimated parameter values.
    Keywords: Bounded rationality; Behavioral learning equilibrium; Adaptive learning; behavioral New Keynesian macro-model; Monetary Policy
    JEL: C11 E62 D83 D84
    Date: 2019–09
  14. By: Hossein Tavakolian; Hamed Ghiaie (Université de Cergy-Pontoise, THEMA)
    Abstract: This paper develops a DSGE model for a small open oil economy which has two rates at official and free (unofficial) markets for foreign currency. In this model, government has access to foreign currency by supplying oil in international markets. Using the oil revenue, the government provides the Central Bank and essential imported goods with foreign currency at the official rate; Other goods are imported at the unofficial rate. The CB’s objective is to minimize the difference between nominal free and official exchange rates. To do so, the CB uses three policy instruments: i) either holds foreign currency as financial assets or sells it to the free market at the unofficial rate, ii) nominal monetary base growth rate and iii) nominal depreciation of official exchange rate. These instruments are applied in this paper in four scenarios of CPI targeting and PPI targeting in both dual and unified exchange rate regimes. Through a welfare analysis, this paper indicates that PPI targeting works better than CPI targeting in this economy. As well, this paper illustrates that PPI targeting under unified system considerably increases welfare. In addition, the interaction between fiscal and monetary policy is assessed. The results show that monetary and exchange rate policies are also more effective when fiscal authority follows a procyclical fiscal rule.
    Keywords: DSGE model, Dual-Exchange Rate System, PPI Inflation Targeting.
    JEL: E52 E58 F41
    Date: 2019
  15. By: Bill Dupor (Federal Reserve Bank of St. Louis); M. Saif Mehkari (University of Richmond); Rong Li (Renmin University of China); Yi-Chan Tsai (National Taiwan University)
    Abstract: New vehicle sales in the U.S. fell nearly 40 percent during the last recession, causing significant job losses and unprecedented government interventions in the auto industry. This paper explores two potential explanations for this decline: falling home values and falling households’ income expectations. First, we establish that declining home values explain only a small portion of the observed reduction in household new vehicle sales. Using a county-level panel from the episode, we find: (1) A one-dollar fall in home values reduced household new vehicle spending by 0.5 to 0.7 cents and overall new vehicle spending by 0.9 to 1.2 cents; and (2) Falling home values explain between 16 and 19 percent of the overall new vehicle spending decline. Next, examining state-level data from 1997-2016, we find: (3) The short-run responses of new vehicle consumption to home value changes are larger in the 2005-2011 period relative to other years, but at longer horizons (e.g. 5 years), the responses are similar across the two sub-periods; and (4) The service flow from vehicles, as measured by miles traveled, responds very little to house price shocks. We also detail the sources of the differences between our findings (1) and (2) from existing research. Second, we establish that declining current and expected future income expectations potentially played an important role in the auto market’s collapse. We build a permanent income model augmented to include infrequent, repeated car buying. Our calibrated model matches the pre-recession distribution of auto vintages and the liquid-wealth-to-income ratio, and exhibits a large vehicle sales decline in response to a mild decline in expected permanent income due to a transitory slowdown in income growth. In response to the shock, households delay replacing existing vehicles, allowing them to smooth the effects of the income shock without significantly adjusting the service flow from their vehicles. Combining our negative results regarding housing wealth with our positive model-based findings, we interpret the auto market collapse as consistent with existing permanent income based approaches to durable goods purchases (e.g., Leahy and Zeira (2005)).
    Date: 2019
  16. By: Gibbs, Christopher G.; McClung, Nigel
    Abstract: We provide suffcient conditions for when a rational expectations structural model predicts bounded responses of endogenous variables to forward guidance announcements. The conditions coincide with a special case of the well-known (E)xpectation-stability conditions that govern when agents can learn a Rational Expectations Equilibrium. Importantly, we show that the conditions are distinct from the determinacy conditions. We show how the conditions are useful for diagnosing the features of a model that contribute to the Forward Guidance Puzzle and reveal how to construct well-behaved forward guidance predictions in standard medium-scale DSGE models.
    JEL: E31 E32 E52 D84 D83
    Date: 2019–09–10
  17. By: Fernando Arce; Julien Bengui; Javier Bianchi
    Abstract: This paper proposes a theory of foreign reserves as macroprudential policy. We study an open economy model of financial crises, in which pecuniary externalities lead to overborrowing, and show that by accumulating international reserves, the government can achieve the constrained-efficient allocation. The optimal reserve accumulation policy leans against the wind and significantly reduces the exposure to financial crises. The theory is consistent with the joint dynamics of private and official capital flows, both over time and in the cross section, and can quantitatively account for the recent upward trend in international reserves.
    JEL: E0 F3 F31
    Date: 2019–09
  18. By: Ansgar Belke; Timo Baas
    Abstract: For more than two decades now, current-account imbalances are a crucial issue in the international policy debate as they threaten the stability of the world economy. More recently, the government debt crisis of the European Union shows that internal current account imbalances inside a currency union may also add to these risks. Oil price fluctuations and a contracting monetary policy that reacts on oil prices, previously discussed to affect the current account may also be a threat to the currency union by changing internal imbalances. Therefore, in this paper, we analyze the impact of oil price shocks on current account imbalances within a currency union. Differences in institutions, especially labor market institutions and trade result in an asymmetric reaction to an otherwise symmetric shock. In this context, we show that oil price shocks can have a long-lasting impact on internal balances, as the exchange rate adjustment mechanism is not available. The common monetary policy authority, however, can reduce such effects by specifying an optimum monetary policy target. Nevertheless, we also show that there is no single best solution. CPI, core CPI or an asymmetric CPI target all come at a cost either regarding an increase in unemployment or increasing imbalances.
    Keywords: Current account deficit, Oil price shocks, DSGE models, Search and matching labor market, Monetary policy
    JEL: E32 F32 Q43
    Date: 2019–03
  19. By: Richard Blundell (University College London); Ran Gu (University of Essex); Soren Leth-Petersen (University of Copenhagen); Hamish Low (University of Oxford); Costas Meghir (Cowles Foundation, Yale University, NBER, IZA, CEPR, and Institute for Fiscal Studies)
    Abstract: We specify an equilibrium model of car ownership with private information where individuals sell and purchase new and second-hand cars over their life-cycle. Private information induces a transaction cost and distorts the market reducing the value of a car as a savings instrument. We estimate the model using data on car ownership in Denmark, linked to register data. The lemons penalty is estimated to be 18% of the price in the first year of ownership, declining with the length of ownership. It leads to large reductions in the turnover of cars and in the probability of downgrading at job loss.
    Keywords: Lemons penalty, Car market, Estimated life-cycle equilibrium model
    JEL: D82 E2
    Date: 2019–09
  20. By: James Albrecht; Xiaoming Cai; Pieter A. Gautier; Susan Vroman
    Abstract: We consider a labor market with search frictions in which workers make multiple applications and firms can post and commit to general mechanisms that may be conditioned both on the number of applications received and on the number of offers received by its candidate. When the contract space includes application fees, there exists a continuum of equilibria of which only one is socially efficient. In the inefficient equilibria, firms have market power that arises from the fact that the value of a worker’s application portfolio depends on what other firms offer, which allows individual firms to free ride and offer workers less than their marginal contribution. Finally, by allowing for general mechanisms, we are able to examine the sources of inefficiency in the multiple applications literature.
    Keywords: multiple applications, directed search, competing mechanisms, efficiency, market power
    JEL: C78 D44 D83
    Date: 2019
  21. By: Kjetil Storesletten (Department of Economics, University of Oslo); Bo Zhao (National School of Development, Peking University); Fabrizio Zilibotti (Cowles Foundation, Yale University)
    Abstract: We document that the nature of business cycles evolves over the process of development and structural change. In countries with large declining agricultural sectors, aggregate employment is uncorrelated with GDP. During booms, employment in agriculture declines while labor productivity increases in agriculture more than in other sectors. We construct a unified theory of business cycles and structural change consistent with the stylized facts. The focal point of the theory is the simultaneous decline and modernization of agriculture. As capital accumulates, agriculture becomes increasingly capital intensive as modern agriculture crowds out traditional agriculture. Structural change accelerates in booms and slows down in recessions. We estimate the model and show that it accounts well for both the structural transformation and the business cycle fluctuations of China.
    Keywords: Agriculture, Business Cycle, Capital Accumulation, China, Employment, Lewis, Modernization, Structural Change
    JEL: E32 O11 O13 O14 O41 O47 O53
    Date: 2019–08
  22. By: Mykola Babiak; Roman Kozhan
    Abstract: We examine how parameter learning amplifies the impact of macroeconomic shocks on equity prices and quantities in a standard production economy where a representative agent has Epstein-Zin preferences. An investor observes technology shocks that follow a regime-switching process, but does not know the underlying model parameters governing the short-term and long-run perspectives of economic growth. We show that rational parameter learning endogenously generates longrun productivity and consumption risks that help explain a wide array of dynamic pricing phenomena. The asset pricing implications of subjective long-run risks crucially depend on the introduction of a procyclical dividend process consistent with the data.
    Keywords: parameter learning; equity premium; business cycles; Markov switching
    JEL: D83 E13 E32 G12
    Date: 2019–04

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