Nominal Rigidities and the Term Structures of Equity and Bond Returns

Pier dup Lopez, David Lopez-Salido and Francisco Vazquez-Grande
Additional contact information
Francisco Vazquez-Grande: https://www.federalreserve.gov/econres/francisco-vazquez-grande.htm
Authors registered in the RePEc Author Service: Pierlauro Lopez

No 2015-64, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: A downward-sloping term structure of equity and upward-sloping term structures of interest rates arise endogenously in a general-equilibrium model with nominal rigidities and nonlinear habits in consumption. Countercyclical marginal costs exacerbate the procyclicality of dividends after a technology shock, and hence their riskiness, and generate countercyclical inflation. Marginal costs gradually fall after a negative technology shock as the price level increases sluggishly, so the payoffs of short-duration dividend claims (bonds) are more (less) procyclical than the payoffs of long-duration claims (bonds). The simultaneous presence of market and home consumption habits allows for uniting nonlinear habits and a production economy without compromising the ability of the model to fit macroeconomic variables.

Keywords: Equity and bond yields; habit formation; nominal rigidities; structural term structure modeling (search for similar items in EconPapers)
JEL-codes: E43 E44 G12 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2015-06-25
New Economics Papers: this item is included in nep-fmk, nep-ger and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (19)

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http://www.federalreserve.gov/econresdata/feds/2015/files/2015064pap.pdf Full text (application/pdf)
http://dx.doi.org/10.17016/FEDS.2015.064 http://dx.doi.org/10.17016/FEDS.2015.064 (application/pdf)

Related works:
Working Paper: Nominal Rigidities and the Term Structures of Equity and Bond Returns (2023)
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