Real and Nominal Equilibrium Yield Curves: Wage Rigidities and Permanent Shocks

54 Pages Posted: 22 Apr 2016 Last revised: 21 Sep 2016

See all articles by Alex Hsu

Alex Hsu

Georgia Institute of Technology - Scheller College of Business

Erica X. N. Li

Cheung Kong Graduate School of Business

Francisco Palomino

Board of Governors of the Federal Reserve System

Date Written: April, 2016

Abstract

The links between real and nominal bond risk premia and macroeconomic dynamics are explored quantitatively in a model with nominal rigidities and monetary policy. The estimated model captures macroeconomic and yield curve properties of the U.S. economy, implying significantly positive real term and inflation risk bond premia. In contrast to previous literature, both premia are positive and generated by wage rigidities as a compensation for permanent productivity shocks. Stronger policy-rule responses to inflation (output) increase (decrease) both premia, while policy surprises generate negligible risk premia. Empirical evidence of the economic mechanism is provided.

JEL Classification: D51, E43, E44, E52, G12

Suggested Citation

Hsu, Alex and Li, Erica X. N. and Palomino, Francisco, Real and Nominal Equilibrium Yield Curves: Wage Rigidities and Permanent Shocks (April, 2016). FEDS Working Paper No. 2016-32, Available at SSRN: https://ssrn.com/abstract=2768607 or http://dx.doi.org/10.17016/FEDS.2016.032

Alex Hsu (Contact Author)

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States
4043851123 (Phone)

Erica X. N. Li

Cheung Kong Graduate School of Business ( email )

1 East ChangAn Avenue, Oriental Plaza, E2, 20/F
One East Chang An Avenue
Beijing, 100738
China

Francisco Palomino

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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