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An estimated DSGE model: Explaining variation in nominal term premia, real term premia, and inflation risk premia

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  • Andreasen, Martin M.

Abstract

This paper develops a DSGE model which is shown to explain variation in the nominal and real term structure as well as inflation surveys and four macrovariables for the UK economy. The model is estimated based on a third-order approximation to allow for time-varying term premia. We find a fall in nominal term premia during the 1990s which mainly is caused by lower inflation risk premia. A structural decomposition further shows that this fall is driven by negative preference shocks, lower fixed production costs, positive investment shocks, and a more aggressive response to inflation by the Bank of England.

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Bibliographic Info

Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 56 (2012)
Issue (Month): 8 ()
Pages: 1656-1674

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Handle: RePEc:eee:eecrev:v:56:y:2012:i:8:p:1656-1674

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Web page: http://www.elsevier.com/locate/eer

Related research

Keywords: Market price of risk; Non-linear filtering; Quantity of risk; Epstein–Zin–Weil preferences; Third-order perturbation;

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Cited by:
  1. Hatcher, Michael, 2013. "The Inflation Risk Premium on Government Debt in an Overlapping Generations Model," SIRE Discussion Papers 2013-81, Scottish Institute for Research in Economics (SIRE).
  2. Hall, Jamie, 2012. "Consumption dynamics in general equilibrium," MPRA Paper 43933, University Library of Munich, Germany.
  3. Eric Swanson, 2013. "Implications of Labor Market Frictions for Risk Aversion and Risk Premia," 2013 Meeting Papers 1137, Society for Economic Dynamics.
  4. Benjamin Born & Johannes Pfeifer, 2014. "Risk Matters: A Comment," CESifo Working Paper Series 4793, CESifo Group Munich.
  5. John Y. Campbell & Carolin Pflueger & Luis M. Viceira, 2013. "Monetary Policy Drivers of Bond and Equity Risks," Harvard Business School Working Papers 14-031, Harvard Business School, revised Apr 2014.

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