Government bond risk premia and the cyclicality of fiscal policy

Kai Christoffel, Juha Kilponen and Ivan Jaccard

No 1411, Working Paper Series from European Central Bank

Abstract: We introduce a specification of habit formation featuring non-separability between consumption and leisure into an otherwise standard New Keynesian model. The model can be estimated with standard Bayesian techniques and the bond pricing implications are evaluated using higher-order approximations. The model is able to reproduce a sizeable risk premium on long-term bonds and the cyclicality of fiscal policy has an impact on the bond premium that is quantitatively important. Technology, government spending, and mark-up shocks are the main drivers of the time-variation in bond premia. JEL Classification: E5, E6, G1

Keywords: bond risk premium; DSGE models; fiscal policy; monetary policy (search for similar items in EconPapers)
Date: 2011-12
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-upt
Note: 85234
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20111411

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