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Pricing Assets in an Economy with Two Types of People

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  • Farmer, Roger

Abstract

This paper constructs a general equilibrium model with two types of people where asset price fluctuations are caused by random shocks to the price level that reallocate consumption across generations. In this model, asset prices are volatile, and price-earnings ratios are persistent, even though there is no fundamental uncertainty and financial markets are sequentially complete. I show that the model can explain a substantial risk premium while generating smooth time series for consumption and financial assets across types. In my model, asset price fluctuations are Pareto inefficient and there is a role for treasury or central bank intervention to stabilize asset prices.

Suggested Citation

  • Farmer, Roger, 2016. "Pricing Assets in an Economy with Two Types of People," CEPR Discussion Papers 11253, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:11253
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    Cited by:

    1. Farmer, Roger E.A. & Nicolò, Giovanni, 2018. "Keynesian economics without the Phillips curve," Journal of Economic Dynamics and Control, Elsevier, vol. 89(C), pages 137-150.
    2. Roger E. A. Farmer, 2018. "Pricing Assets in a Perpetual Youth Model," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 30, pages 106-124, October.

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    More about this item

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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