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THE SPIRIT OF CAPITALISM, ASSET RETURNS, AND THE BUSINESS CYCLE

Published online by Cambridge University Press:  19 March 2007

MARTIN BOILEAU  and
REBECCA BRAEU
MARTIN BOILEAU
Affiliation:
University of Colorado
REBECCA BRAEU
Affiliation:
California State University, Long Beach
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Abstract

We evaluate whether the spirit of capitalism improves the ability of the real business cycle model to explain the main features of both asset return and the business cycle. In our model, the spirit of capitalism is embodied in the assumption that individuals have preferences for financial wealth. Our simulation results suggest that this assumption may improve the model's ability to explain the risk-free rate puzzle but not the equity premium puzzle. This assumption also markedly deteriorates the model's ability to account for the main features of the business cycle.

Keywords

Direct Preferences for WealthEquity PremiumStatus
Type
ARTICLES
Information
Macroeconomic Dynamics , Volume 11 , Issue 2 , April 2007 , pp. 214 - 230
Copyright
© 2007 Cambridge University Press

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