 Back to the 1980s or not? The drivers of inflation and real risks in Treasury bondsCarolin Pflueger Journal of Financial Economics, 2025, vol. 167, issue C Abstract: This paper shows that supply shock uncertainty interacts with the monetary policy rule to drive bond risks in a New Keynesian asset pricing model. In my model, positive nominal bond-stock betas emerge as the result of volatile supply shocks but only if the monetary policy rule features a high inflation weight. Habit formation preferences generate endogenously time-varying risk premia, explaining the volatility and predictability of bond and stock excess returns in the data, and implying that bond-stock betas price the expected equilibrium mix of shocks rather than realized shocks. The model explains the change from positive nominal and real bond-stock betas in the 1980s to negative nominal and real bond-stock betas in the 2000s with a shift from dominant supply shocks and an inflation-focused monetary policy rule, to demand shocks in the 2000s. Post-pandemic nominal and real bond-stock betas are explained with dominant supply shocks and a late increase in the monetary policy inflation coefficient. Keywords: Bond betas; Stagflation; Soft landing; Supply shocks; Demand shocks; Monetary policy; New Keynesian; Time-varying risk premia (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:167:y:2025:i:c:s0304405x25000352 DOI: 10.1016/j.jfineco.2025.104027 Access Statistics for this article Journal of Financial Economics is currently edited by G. William Schwert More articles in Journal of Financial Economics from Elsevier |
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