Real and Nominal Equilibrium Yield Curves

Alex Hsu (), Erica X. N. Li () and Francisco Palomino
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Alex Hsu: Department of Finance, Georgia Institute of Technology, Atlanta, Georgia 30308
Erica X. N. Li: Department of Finance, Cheung Kong Graduate School of Business, 100738 Beijing, China

Management Science, 2021, vol. 67, issue 2, 1138-1158

Abstract: This paper quantitatively explores the role of external habits, nominal rigidities, and monetary policy for real and nominal bond yields in an asset-pricing endogenous growth model. The calibration captures the reported average positive slopes of U.S. real and nominal yield curves with sizable positive real and nominal bond risk premia. Habits are critical to generate positive real premia by altering the comovement of real rates and productivity shocks. Nominal rigidities generate monetary policy effects on real bonds. Stronger policy rule inflation responses or weaker output responses increase real term premia and reduce inflation risk premia. Relative to standard models, the paper provides an alternative interpretation of real and nominal bond risks. This paper was accepted by Tomasz Piskorski, finance.

Keywords: term structure of interest rates; bond risk premia; monetary policy; nominal rigidities (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:67:y:2021:i:2:p:1138-1158

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