Inspecting the mechanism: closed-form solutions for asset prices in real business cycle models

Abstract

In this paper we derive closed-form solutions for a variety of prices for financial assets in an RBC economy. The equations are based on a log-linear solution of the RBC model and allow a clearer understanding of the determination of risk premia in models with production. We demonstrate not only why the premium of equity over the risk-free rate is small but… (More)

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