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The endogenous growth and asset prices nexus revisited with closed-form solution

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  • Filep-Mosberger, Palma
  • Kaszab, Lorant

Abstract

Endogenous growth models exhibit long-run risks, which are considered a potential explanation of the equity premium puzzle. Unlike previous literature, we use a closed-form solution of a simplified model to make the following contributions. First, we derive a set of conditions for a positive and large equity premium. Second, we match a key driver of endogenous growth, the R&D spending-to-GDP ratio. Third, we include a novel discussion on the role of patent obsolescence. Given that the literature concerns the accuracy of loglinear-lognormal solutions, we solve our model numerically with third-order perturbation. We find additional risk correction due to higher-order terms.

Suggested Citation

  • Filep-Mosberger, Palma & Kaszab, Lorant, 2024. "The endogenous growth and asset prices nexus revisited with closed-form solution," Finance Research Letters, Elsevier, vol. 68(C).
    • Handle: RePEc:eee:finlet:v:68:y:2024:i:c:s154461232401016x
    DOI: 10.1016/j.frl.2024.105986
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    References listed on IDEAS

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    1. Bandi, Federico M. & Bretscher, Lorenzo & Tamoni, Andrea, 2023. "Return predictability with endogenous growth," Journal of Financial Economics, Elsevier, vol. 150(3).
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    9. Donadelli, Michael & Grüning, Patrick, 2021. "Innovation dynamics and fiscal policy: Implications for growth, asset prices, and welfare," The North American Journal of Economics and Finance, Elsevier, vol. 57(C).
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Endogenous growth; Loglinear-lognormal solution; Asset pricing; Equity premium; Third-order perturbation;
    All these keywords.

    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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