Seminar in Macroeconomics - Giacomo Candian (HEC Montréal, CREi)

We identify a shock that explains the bulk of fluctuations in the equity risk premium, and show that the shock also explains a large fraction of the business-cycle comovements of output, consumption, employment, and investment. Recessions induced by the shock are associated with reallocation away from full-time labor positions, and towards part-time and flexible contract workers. We develop a novel real model with labor market frictions and fluctuations in risk appetite, where a "flight-to-safety" reallocation from riskier to safer factors of production precipitates a recession that can explain the data, since the safer factors offer lower marginal products in equilibrium.