Growth-Rate and Uncertainty Shocks in Consumption: Cross-Country Evidence
We provide new estimates of the importance of long-run risks - persistent shocks to growth rates and uncertainty - in a panel of long-term aggregate consumption data for developed countries. We identify large and persistent world shocks to uncertainty, capturing the large but uneven rise and fall of volatility that occurred in many countries over the course of the 20th century. Our estimation also uncovers a highly persistent world growth-rate process, which captures phenomena such as the Great Depression, the post-WWII economic miracle in Europe, and the productivity slowdown of the 1970's. We explore the asset pricing implications of our estimated model. It generates more predictability of asset returns, and greater volatility of the price-dividend ratio than standard calibrations, improving the fit of the model to the data. Countries with higher equity premia in the data are those with higher loadings on long-run risks in our model. Our model thus explains a sizable fraction of the cross-country variation in the equity premium.
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This paper was revised on August 25, 2014
Document Object Identifier (DOI): 10.3386/w18128
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