Working Paper: NBER ID: w24529
Authors: Carolin Pflueger; Emil Siriwardane; Adi Sunderam
Abstract: We document a strong and robust positive relationship between real rates and the contemporaneous valuation of volatile stocks, which we contend measures the economy’s risk appetite. Our novel proxy for risk appetite explains 41% of the variation in the one-year real rate since 1970, while the valuation of the aggregate stock market explains just 1%. In addition, the real rate forecasts returns on volatile stocks, confirming our interpretation that changes in risk appetite drive the real rate. Increases in our measure of risk appetite are followed by a boom in investment and output.
Keywords: risk appetite; real interest rates; macroeconomic performance
JEL Codes: E22; E44; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| risk appetite (pv_st) (G17) | investment-capital ratio (G31) |
| risk appetite (pv_st) (G17) | output (C67) |
| risk appetite (pv_st) (G17) | unemployment rate (J64) |
| risk appetite (pv_st) (G17) | real rate (E43) |