EconPapers    
Economics at your fingertips  
 

Macroeconomic drivers and the pricing of uncertainty, inflation, and bonds

Brandyn Bok, Thomas M. Mertens and John C. Williams

Journal of Financial Economics, 2025, vol. 172, issue C

Abstract: The correlation between uncertainty shocks, as measured by changes in the VIX, and changes in break-even inflation rates declined and turned negative after the Great Recession. This estimated time-varying correlation is shown to be consistent with the predictions of a standard New Keynesian model with a lower bound on interest rates and a trend decline in the natural rate of interest. In one equilibrium of the model, higher uncertainty raises the probability of large shocks that leave the central bank constrained by the lower bound and unable to offset negative shocks. Resulting inflation shortfalls lower average inflation rates.

Keywords: Uncertainty shocks; Inflation-uncertainty correlations; Zero lower bound (search for similar items in EconPapers)
JEL-codes: E52 G12 (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0304405X25001382
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:172:y:2025:i:c:s0304405x25001382

DOI: 10.1016/j.jfineco.2025.104130

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
Bibliographic data for series maintained by Catherine Liu ().

 
Page updated 2025-09-09
Handle: RePEc:eee:jfinec:v:172:y:2025:i:c:s0304405x25001382