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Risk Premia at the ZLB: a macroeconomic interpretation

Phuong Ngo and Francois Gourio ()

No 1585, 2016 Meeting Papers from Society for Economic Dynamics

Abstract: Long-term interest rates have fallen to historically low levels since the Great Recession started. One potential contributor are low premia for infl‡ation and interest rate risk. We show how a fairly standard New Keynesian macroeconomic model generates lower infl‡ation and interest rate risk premia when the economy becomes close to the zero lower bound (ZLB). In particular, the in‡flation risk premia switches from positive to negative. We provide evidence consistent with this mechanism: since 2009, investors seem to view infl‡ation as more positively correlated with the price of risky assets.

Date: 2016
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mon
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Working Paper: Risk Premia at the ZLB: A Macroeconomic Interpretation (2020) Downloads
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