Speaker: Ctirad Slavik (University of Minnesota)
Venue: MNB-Visitor Centre
Time: 15.15 pm, Thursday(!) February 18, 2010
Abstract:
Existing dynamic general equilibrium models have failed to explain the high volatility of asset prices that we observe in the data. We construct a general equilibrium model with heterogenous firms and financial frictions that addresses this failure. In each period only a fraction of _rms can start new projects, which cannot be fully financed externally due to a financial constraint. We allow the tightness of the financial constraint to vary over time. Fluctuations in the tightness of the financial constraint result in uctuations in the supply of equity and consequently in the price of equity. We calibrate the model to the U.S. data to assess the quantitative importance of uctuations in the tightness of the financial constraint. The model generates a volatility in the price of equity comparable to the
aggregate stock market while also fitting key aspects of the behavior of aggregate quantities.
JEL Classification: E20, E32, G12
Keywords: General Equilibrium, Business Cycles, Asset Pricing, Excess Volatility Puzzle