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Disasterization: A Simple Way to Fix the Asset Pricing Properties of Macroeconomic Models

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  • Xavier Gabaix

Abstract

A central difficulty in economics is to create a model with both good business cycle properties and asset pricing properties. I show how to solve this difficulty by a simple portable modeling device: the "disasterization" of models. Take an economy with good business cycle properties and create a new, "disasterized" economy, which is essentially identical to the original one except that disasters can destroy part of the capital stock and productivity. In such a disasterized economy, asset prices exhibit high and volatile risk premia, but macro variables remain unchanged. Perturbations of this benchmark allow for feedback from finance to macro.

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  • Xavier Gabaix, 2011. "Disasterization: A Simple Way to Fix the Asset Pricing Properties of Macroeconomic Models," American Economic Review, American Economic Association, vol. 101(3), pages 406-409, May.
    • Handle: RePEc:aea:aecrev:v:101:y:2011:i:3:p:406-09
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    References listed on IDEAS

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    1. TallariniJr., Thomas D., 2000. "Risk-sensitive real business cycles," Journal of Monetary Economics, Elsevier, vol. 45(3), pages 507-532, June.
    2. Robert J. Barro, 2006. "Rare Disasters and Asset Markets in the Twentieth Century," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 121(3), pages 823-866.
    3. Jessica A. Wachter, 2013. "Can Time-Varying Risk of Rare Disasters Explain Aggregate Stock Market Volatility?," Journal of Finance, American Finance Association, vol. 68(3), pages 987-1035, June.
    4. Xavier Gabaix, 2012. "Variable Rare Disasters: An Exactly Solved Framework for Ten Puzzles in Macro-Finance," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 127(2), pages 645-700.
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    Cited by:

    1. Stijn Claessens & M Ayhan Kose, 2018. "Frontiers of macrofinancial linkages," BIS Papers, Bank for International Settlements, number 95.
    2. Jessica Wachter & Mete Kilic, 2017. "Risk, Unemployment, and the Stock Market: A Rare-Event-Based Explanation of Labor Market Volatility," 2017 Meeting Papers 129, Society for Economic Dynamics.
    3. Cantelmo, Alessandro & Melina, Giovanni & Papageorgiou, Chris, 2023. "Macroeconomic outcomes in disaster-prone countries," Journal of Development Economics, Elsevier, vol. 161(C).
    4. Priyank Gandhi, 2018. "The relation between bank credit growth and the expected returns of bank stocks," European Financial Management, European Financial Management Association, vol. 24(4), pages 610-649, September.
    5. Marfè, Roberto & Pénasse, Julien, 2024. "Measuring macroeconomic tail risk," Journal of Financial Economics, Elsevier, vol. 156(C).
    6. Roberto Marfè & Julien Penasse, 2016. "The Time-Varying Risk of Macroeconomic Disasters," Carlo Alberto Notebooks 463, Collegio Carlo Alberto.
    7. Marlène Isoré, 2018. "Changes in Natural Disaster Risk: Macroeconomic Responses in Selected Latin American Countries," Economies, MDPI, vol. 6(1), pages 1-12, February.
    8. Jerry Tsai & Jessica A. Wachter, 2015. "Disaster Risk and its Implications for Asset Pricing," NBER Working Papers 20926, National Bureau of Economic Research, Inc.
    9. Jesus Fernandez-Villaverde & Pablo Guerron-Quintana, 2020. "Uncertainty Shocks and Business Cycle Research," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 37, pages 118-166, August.
    10. Gomes, João F. & Grotteria, Marco & Wachter, Jessica A., 2023. "Foreseen risks," Journal of Economic Theory, Elsevier, vol. 212(C).
    11. William Ginn, 2022. "Climate Disasters and the Macroeconomy: Does State-Dependence Matter? Evidence for the US," Economics of Disasters and Climate Change, Springer, vol. 6(1), pages 141-161, March.
    12. Isoré, Marlène & Szczerbowicz, Urszula, 2017. "Disaster risk and preference shifts in a New Keynesian model," Journal of Economic Dynamics and Control, Elsevier, vol. 79(C), pages 97-125.
    13. Stefan Mittnik & Willi Semmler & Alexander Haider, 2020. "Climate Disaster Risks—Empirics and a Multi-Phase Dynamic Model," Econometrics, MDPI, vol. 8(3), pages 1-27, August.
    14. Alessandro Cantelmo, 2022. "Rare Disasters, the Natural Interest Rate and Monetary Policy," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 84(3), pages 473-496, June.
    15. Stijn Claessens & M. Ayhan Kose, 2017. "Asset prices and macroeconomic outcomes: A survey," CAMA Working Papers 2017-76, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    16. Levintal, Oren, 2017. "Fifth-order perturbation solution to DSGE models," Journal of Economic Dynamics and Control, Elsevier, vol. 80(C), pages 1-16.
    17. François Gourio & Anil K. Kashyap & Jae W. Sim, 2018. "The Trade offs in Leaning Against the Wind," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 66(1), pages 70-115, March.
    18. Malmendier, Ulrike & Pouzo, Demian & Vanasco, Victoria, 2020. "Investor experiences and financial market dynamics," Journal of Financial Economics, Elsevier, vol. 136(3), pages 597-622.
    19. Emmanuel Farhi & Francois Gourio, 2018. "Accounting for Macro-Finance Trends: Market Power, Intangibles, and Risk Premia," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 49(2 (Fall)), pages 147-250.
    20. Gregory, Richard P., 2021. "Climate disasters, carbon dioxide, and financial fundamentals," The Quarterly Review of Economics and Finance, Elsevier, vol. 79(C), pages 45-58.
    21. Simon Oh & Jessica A. Wachter, 2018. "Cross-sectional Skewness," NBER Working Papers 25113, National Bureau of Economic Research, Inc.
    22. Jianjun Miao & Bin Wei & Hao Zhou, 2019. "Ambiguity Aversion and the Variance Premium," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 9(02), pages 1-36, June.
    23. Mete Kilic & Jessica A. Wachter, 2015. "Risk, Unemployment, and the Stock Market: A Rare-Event-Based Explanation of Labor Market Volatility," NBER Working Papers 21575, National Bureau of Economic Research, Inc.

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