Handbook of the Equity Risk Premium

5. PRODUCTION, INVESTMENT, AND GENERAL EQUILIBRIUM

If we want to link asset prices to macroeconomics, consumption seems like a weak link. Aggregate nondurable and services consumption is about the smoothest and least cyclical of all economic time series. Macroeconomic shocks are seen in output, investment, employment and unemployment, and so forth. Consumers themselves are a weak link; we have to think about which predictions of the model are robust to small costs of information, transaction or attention. For example, a one-month delay in adjusting consumption would destroy a test in monthly data, yet it would have trivial utility costs, or equivalently it could result from perfect optimization with trivially small transaction and information ...