Emi Nakamura

Crises and Recoveries in an Empirical Model of Consumption Disasters

Coauthor(s): Robert Barro, Jón Steinsson, José Ursúa.

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Abstract:
We estimate an empirical model of consumption disasters using a new panel data set on consumption for 24 countries and more than 100 years. The model allows for permanent and transitory effects of disasters that unfold over multiple years. It also allows the timing of disasters to be correlated across countries. We estimate the model using Bayesian methods. Our estimates imply that the probability of entering a disaster is 1.7% per year and that disasters last on average for 6.5 years. In the average disaster episode identifi ed by our model consumption falls by 30% in the short run. In the long run, roughly half of this fall in consumption is reversed. Disasters also greatly increase uncertainty about consumption growth. Our estimates imply a standard deviation of consumption growth during disasters of 12%. We investigate the asset pricing implications of these rare disasters. In a model with power utility and standard values for risk aversion, stocks surge at the onset of a disaster due to agents' strong desire to save. This counterfactual prediction causes a low equity premium, especially in normal times. In contrast, a model with Epstein-Zin-Weil preferences and an intertemporal elasticity of substitution equal to 2 yields a sizeable equity premium in normal times for modest values of risk aversion.

Source: Working Paper
Exact Citation:
Barro, Robert, Emi Nakamura, Jón Steinsson, and José Ursúa. "Crises and Recoveries in an Empirical Model of Consumption Disasters." Working Paper, Columbia Business School, January 31, 2010.
Date: 31 1 2010