Back to the 1980s or Not? The Drivers of Inflation and Real Risks in Treasury Bonds

Carolin Pflueger

No 30921, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: I use nominal and real bond risks as new moments to discipline a New Keynesian asset pricing model, where supply shocks, demand shocks, and monetary policy are the fundamental drivers of inflation. Endogenously time-varying risk premia imply that nominal bond risks—as measured by their stock market beta—are a forward-looking indicator of stagflation risks. Calibrating the model separately for the 1980s and the 2000s, I show that positive nominal bond betas in the 1980s resulted from a “perfect storm” of supply shocks and a reactive monetary policy rule, but not from either supply shocks or monetary policy in isolation.

JEL-codes: E0 E31 E40 G10 G12 (search for similar items in EconPapers)
Date: 2023-02
New Economics Papers: this item is included in nep-cba, nep-dge, nep-fmk and nep-mon
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