Ryan Chahrour (Boston College) - Risky Business Cycles

We identify a shock that explains the bulk of fluctuations in equity risk premia, and show that the shock also explains a large fraction of business cycle comovement of output, consumption, hours, and investment. Recessions induced by the shock are associated with reallocation away from full-time permanent positions, towards part-time and flexible contract workers. A real model with labor market frictions and fluctuations in risk appetite can explain all of these facts, both qualitatively and quantitatively. The size of risk-driven fluctuations depends on the relationship between the riskiness and productivity of different stores of value: if safe savings vehicles have relatively low marginal products, then a flight to safety will drive a larger aggregate contraction.


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