Journal Article
How Can Consumption-Based Asset-Pricing Models Explain Low Interest Rates?
Abstract: The real interest rate is at historically low levels following the Great Recession. This article examines under which conditions the leading consumption-based asset-pricing models can give rise to such a reduction. In particular, we examine implications of standard constant relative risk aversion preference models with Gaussian shocks, models with consumption disaster, models with long-run risk, and models with habit formation. Given the models reviewed, the high-risk premium suggests that low interest rates in the recent period are likely to be either a consequence of a perception that consumption risk is particularly high, or of very low risk tolerance.
Access Documents
File(s):
File format is application/pdf
https://www.richmondfed.org/-/media/richmondfedorg/publications/research/economic_quarterly/2014/q3/pdf/schwartzman.pdf
Description: Full text
Authors
Bibliographic Information
Provider: Federal Reserve Bank of Richmond
Part of Series: Economic Quarterly
Publication Date: 2014
Issue: 3Q
Pages: 209-240