Model misspecification, the equilibrium natural interest rate and the equity premium

Oreste Tristani

No 808, Working Paper Series from European Central Bank

Abstract: This paper analyses the determinants of the natural rate of interest in a non-linear model where agents are uncertain over both future technology growth and the future course of monetary policy. I show that the real natural rate can be affected by sizable uncertainty premia, including premia associated with monetary un-certainty. This result is potentially problematic for both the estimation of the natural rate and its use as a policy indicator. Monetary uncertainty can also contribute to amplify the equity premium, and to account for its apparent, positive link with inflation. JEL Classification: E43, G11

Keywords: equity premium puzzle; model misspecification.; natural rate of interest; risk-free rate puzzle; robust control (search for similar items in EconPapers)
Date: 2007-09
Note: 24907
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Related works:
Journal Article: Model Misspecification, the Equilibrium Natural Interest Rate, and the Equity Premium (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:2007808

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