Model Misspecification, the Equilibrium Natural Interest Rate, and the Equity Premium

Oreste Tristani ()

Journal of Money, Credit and Banking, 2009, vol. 41, issue 7, pages 1453-1479

Abstract: This paper analyzes the natural rate of interest and the equity premium in a nonlinear model where agents are uncertain over both future technology growth and the future course of monetary policy. I show that model uncertainty, and notably uncertainty on the future course of monetary policy, can give rise to a sizable precautionary savings motive. This result is potentially problematic for both the estimation of the natural rate and its use as a policy indicator. Monetary uncertainty can also contribute to amplify the equity premium, and to account for its apparent, positive link with inflation. Copyright (c) 2009 The Ohio State University.

Date: 2009

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Working Paper: Model misspecification, the equilibrium natural interest rate and the equity premium (2007)
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