Long-run economic uncertainty

Finance

Social Sciences Research Network

2018

Higher levels of long-run economic uncertainty are shown to predict larger risk premia as well as lower inflation rates, lower consumption growth and lower output growth over business-cycle to generational horizons. When seen through an asset pricing lens, the relation between long-run uncertainty and future inflation rates is a necessary by-product of three conditions: the (near) orthogonality of long-run uncertainty with respect to the dividend-to-price ratio, the ability of long-run uncertainty to strongly predict future risk premia, and its inability to predict nominal cash flows and real interest rates. A general class of equilibrium models with price rigidities is used to provide an economic channel.

Financial uncertainty; Policy uncertainty; Macro uncertainty; The long run; The real economy

Social Sciences Research Network

No