What do Nominal Rigidities and Monetary Policy tell us about the Real Yield Curve?

Francisco Palomino and Alex Hsu
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Alex Hsu: Georgia Tech

No 50, 2013 Meeting Papers from Society for Economic Dynamics

Abstract: We study term and inflation risk premia in real and nominal bonds, respectively, in an equilibrium model calibrated to United States data. Nominal wage and price rigidities, and an interest-rate monetary policy rule characterize our model economy. Wage rigidities induce positive term and inflation risk premia for permanent productivity shocks: they generate high marginal utility, expected consumption growth, inflation, and bond yields, simultaneously. Policy and inflation-target shocks increase real and nominal yield variability, respectively. Real-nominal bond return correlations are increased by the rigidities. Stronger policy responses to output and inflation reduce real term premia and increase inflation risk premia.

Date: 2013
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac, nep-mon and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed013:50

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