The risk premium in New Keynesian DSGE models: The cost of inflation channel

Leonardo Iania, Pavel Tretiakov and Raf Wouters

No 2023013, LIDAM Reprints LFIN from Université catholique de Louvain, Louvain Finance (LFIN)

Abstract: We study the role of the cost of inflation channel in determining the risk premium in a (nonlinear) New Keynesian DSGE model. Relying on a Calvo (or Rotemberg) price setting, we show that while the cost of inflation channel generates the desired term premium moments, it suffers from nontrivial, counterintuitive approximation errors in the price dispersion function. In addition to documenting the issues, we propose ways to alleviate them, including a quasikinked demand function as a risk-generating mechanism.

Keywords: Macro-finance; DSGE; Term premia (search for similar items in EconPapers)
JEL-codes: E31 E43 E44 E52 G12 (search for similar items in EconPapers)
Pages: 18
Date: 2023-08-28
Note: In: Journal of Economic Dynamics and Control, 2023, vol. 155, 104732
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: The risk premium in New Keynesian DSGE models: The cost of inflation channel (2023)
Working Paper: The risk premium in New Keynesian DSGE models: the cost of inflation channel (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:ajf:louvlr:2023013

DOI: 10.1016/j.jedc.2023.104732

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