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Examining the bond premium puzzle with a DSGE model

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Author Info
Rudebusch, Glenn D.
Swanson, Eric T.

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Abstract

The basic inability of standard theoretical models to generate a sufficiently large and variable nominal bond risk premium has been termed the "bond premium puzzle." We show that the term premium on long-term bonds in the canonical dynamic stochastic general equilibrium (DSGE) model used in macroeconomics is far too small and stable relative to the data. We find that introducing long-memory habits in consumption as well as labor market frictions can help fit the term premium, but only by seriously distorting the DSGE model's ability to fit other macroeconomic variables, such as the real wage; therefore, the bond premium puzzle remains.

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Publisher Info
Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 55 (2008)
Issue (Month): Supplement 1 (October)
Pages: S111-S126
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Handle: RePEc:eee:moneco:v:55:y:2008:i:s1:p:s111-s126

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Web page: http://www.elsevier.com/locate/inca/505566

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Keywords: Yield curve Term premium Bond pricing;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Glenn Rudebusch & Eric Swanson, 2008. "The bond premium in a DSGE model with long-run real and nominal risks," Working Paper Series 2008-31, Federal Reserve Bank of San Francisco. [Downloadable!]
    Other versions:
  2. François Gourio, 2009. "Disasters Risk and Business Cycles," NBER Working Papers 15399, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Taeyoung Doh, 2009. "Yield curve in an estimated nonlinear macro model," Research Working Paper RWP 09-04, Federal Reserve Bank of Kansas City. [Downloadable!]
  4. Felix Geiger, 2009. "International Interest-Rate Risk Premia in Affine Term Structure Models," Diskussionspapiere aus dem Institut für Volkswirtschaftslehre der Universität Hohenheim 316/2009, Department of Economics, University of Hohenheim, Germany. [Downloadable!]
  5. Martin Møller Andreasen, 2008. "Explaining Macroeconomic and Term Structure Dynamics Jointly in a Non-linear DSGE Model," CREATES Research Papers 2008-43, School of Economics and Management, University of Aarhus. [Downloadable!]
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