Skip to main content

Habit Persistence, Asset Returns and the Business Cycle

Staff Report 280 | Published November 1, 2000

Download PDF

Authors

Michele Boldrin

Jonas D. M. Fisher

Habit Persistence, Asset Returns and the Business Cycle

Abstract

We introduce two modifications into the standard real business cycle model: habit persistence preferences and limitations on intersectoral factor mobility. The resulting model is consistent with the observed mean equity premium, mean risk free rate and Sharpe ratio on equity. The model does roughly as well as the standard real business cycle model with respect to standard measures. On four other dimensions its business cycle implications represent a substantial improvement. It accounts for (i) persistence in output, (ii) the observation that employment across different sectors moves together over the business cycle, (iii) the evidence of ‘excess sensitivity’ of consumption growth to output growth, and (iv) the ‘inverted leading indicator property of interest rates,’ that high interest rates are negatively correlated with future output.


Published In: American Economic Review (Vol. 91, No. 1, March 2001, pp. 149-166) https://doi.org/10.1257/aer.91.1.149
Published In: Macroeconomic Dynamics (Vol. 1, No. 2, June 1997) https://doi.org/10.1017/S1365100597003027

Download Paper (pdf)