Real and Nominal Equilibrium Yield Curves: Wage Rigidities and Permanent Shocks

Alex Hsu (), Erica X. N. Li and Francisco Palomino
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Alex Hsu: https://www.scheller.gatech.edu/directory/faculty/hsu/index.html

No 2016-032, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: The links between real and nominal bond risk premia and macroeconomic dynamics are explored quantitatively in a model with nominal rigidities and monetary policy. The estimated model captures macroeconomic and yield curve properties of the U.S. economy, implying significantly positive real term and inflation risk bond premia. In contrast to previous literature, both premia are positive and generated by wage rigidities as a compensation for permanent productivity shocks. Stronger policy-rule responses to inflation (output) increase (decrease) both premia, while policy surprises generate negligible risk premia. Empirical evidence of the economic mechanism is provided.

Keywords: Term structure of interest rates; bond risk premia; monetary policy; nominal rigidities (search for similar items in EconPapers)
JEL-codes: D51 E43 E44 E52 G12 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2016-04-12
New Economics Papers: this item is included in nep-dge and nep-mac
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2016-32

DOI: 10.17016/FEDS.2016.032

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