New Goods and Asset Prices

I propose an extension to the consumption capital asset pricing model to incorporate the introduction of new goods over time and states of nature. In the model, consumers have a love of variety, and consumption consists of different components—product groups and brands. Expected growth in product groups increases expected future marginal utility, raising the incentive to save—thereby reducing the risk-free rate of interest. Meanwhile, variations in brand and quality growth over the business cycle make marginal utility more volatile and countercyclical—thereby raising the expected equity premium. ∗This is a revised version of part of my doctoral dissertation at the University of California, Berkeley. I thank my advisors, David Romer and Chad Jones, for helpful comments on an earlier version. Email: [email protected]