A Macroeconomic Model of Equities and Real, Nominal, and Defaultable Debt

Linkages between the real economy and financial markets are important, as evi-denced by the 2007–09 financial crisis and European sovereign debt crisis. This paper develops a simple, structural macroeconomic model that is consistent with a wide variety of asset pricing facts, such as the size and variability of risk pre-mia on equities, real and nominal government bonds, and corporate bonds, com-monly referred to as the equity premium puzzle, bond premium puzzle, and credit spread puzzle, respectively. The paper makes two main contributions: First, I unify a variety of asset pricing puzzles into a single, structural asset pricing framework. Second, I show how standard dynamic macroeconomic models can be brought into general agreement with a range of asset prices, making it pos-sible to use these models to study the linkages between risk premia in financial markets and the real economy