Working Paper No. 04-07
The Spirit of Capitalism, Asset Returns, and the Business Cycle
Martin Boileau and Rebecca W. Brown
We evaluate whether the spirit of capitalism improves the ability of real business cycle (RBC) models to explain the main features of both asset returns and business cycles. In our model, the spirit of capitalism is embodied in the assumption that individuals have direct preferences for financial wealth. Our simulation results suggest that this assumption improves the RBC model's ability to explain the features of asset returns. This assumption, however, markedly deteriorates the model's ability to account for the features of the business cycle.
JEL classification: G12; E32
Keywords: equity premium; direct preferences for wealth