Munich Personal RePEc Archive

Disaster risk and preference shifts in a New Keynesian model

Isoré, Marlène and Szczerbowicz, Urszula (2015): Disaster risk and preference shifts in a New Keynesian model.

[thumbnail of MPRA_paper_65643.pdf]

Download (549kB) | Preview


This paper analyzes the effects of a change in a small but time-varying “disaster risk” à la Gourio (2012) in a New Keynesian model. In a real business cycle framework, the disaster risk has been successful in replicating observed moments of equity premia. However, responses of macroeconomic variables critically depend on the value of the elasticity of intertemporal substitution (EIS). In particular, we show here that an increase in the probability of disaster causes a recession only in case of an EIS larger than unity, which may be arbitrarily large. Nevertheless, we also find that incorporating sticky prices allows to conciliate recessionary effects of the disaster risk with a plausible value of the EIS. A higher disaster risk is then also associated with an increase in the discount factor and with deflation, making it consistent with the preference shock literature (Christiano et al., 2011).

Atom RSS 1.0 RSS 2.0

Contact us: mpra@ub.uni-muenchen.de

This repository has been built using EPrints software.

MPRA is a RePEc service hosted by Logo of the University Library LMU Munich.