The bond premium in a DSGE model with long-run real and nominal risks

Glenn D. Rudebusch () and Eric T. Swanson ()

No 143, Working Paper Research from National Bank of Belgium

Abstract: The term premium on nominal long-term bonds in the standard dynamic stochastic general equilibrium (DSGE) model used in macroeconomics is far too small and stable relative to empirical measures obtained from the data - an example of the "bond premium puzzle." However, in models of endowment economies, researchers have been able to generate reasonable term premiums by assuming that investors face long-run economic risks and have recursive Epstein-Zin preferences. We show that introducing these two elements into a canonical DSGE model can also produce a large and variable term premium without compromising the model's ability to fit key macroeconomic variables.

New Economics Papers: this item is included in nep-cba and nep-dge
Date: 2008-10
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Related works:
Journal Article: The Bond Premium in a DSGE Model with Long-Run Real and Nominal Risks (2012)
Working Paper: The bond premium in a DSGE model with long-run real and nominal risks (2008)
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Persistent link: http://EconPapers.repec.org/RePEc:nbb:reswpp:200810-18

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