New model reveals why stock prices soar while bond returns plummet
The article explores how limited commitment affects asset prices and business cycles. By studying a model with different agents facing borrowing and savings constraints, the researchers found that these constraints lead to underinvestment in capital and higher volatility in equity prices. This results in higher average returns on stocks and lower returns on bonds. The study shows that savings constraints become more important when capital is included in the model, highlighting the impact of limited commitment on economic outcomes.