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Abstract

We introduce a specification of habit formation featuring non-separability between consumption and leisure into an otherwise standard New Keynesian model. The model can be estimated with standard Bayesian techniques and the bond pricing implications are evaluated using higher-order approximations. The model is able to reproduce a sizeable risk premium on long-term bonds and the cyclicality of fiscal policy has an impact on the bond premium that is quantitatively important. Technology, government spending, and mark-up shocks are the main drivers of the time-variation in bond premia. JEL Classification: E5, E6, G1.

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 1411.

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Length: 57 pages
Date of creation: Dec 2011
Date of revision:
Handle: RePEc:ecb:ecbwps:20111411

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Related research

Keywords: DSGE models; fiscal policy; bond risk premium; monetary policy.;

Find related papers by JEL classification:

• E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
• E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
• G1 - Financial Economics - - General Financial Markets

This paper has been announced in the following NEP Reports:

• NEP-ALL-2012-01-03 (All new papers)
• NEP-CBA-2012-01-03 (Central Banking)
• NEP-DGE-2012-01-03 (Dynamic General Equilibrium)
• NEP-MAC-2012-01-03 (Macroeconomics)
• NEP-UPT-2012-01-03 (Utility Models & Prospect Theory)

References

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1. Leeper, Eric M. & Plante, Michael & Traum, Nora, 2010. "Dynamics of fiscal financing in the United States," Journal of Econometrics, Elsevier, vol. 156(2), pages 304-321, June.
   
   • Eric M. Leeper, Michael Plante, Nora Traum, 2009. "Dynamics Of Fiscal Financing In The United States," Caepr Working Papers 2009-012, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
   • Eric M. Leeper & Michael Plante & Nora Traum, 2009. "Dynamics of Fiscal Financing in the United States," NBER Working Papers 15160, National Bureau of Economic Research, Inc.
2. Eric M. Leeper, 2010. "Monetary Science, Fiscal Alchemy," NBER Working Papers 16510, National Bureau of Economic Research, Inc.
3. Peter Hördahl & Oreste Tristani & David Vestin, 2008. "The Yield Curve and Macroeconomic Dynamics," Economic Journal, Royal Economic Society, vol. 118(533), pages 1937-1970, November.
   
   • Peter Hördahl & Oreste Tristani & David Vestin, 2007. "The yield curve and macroeconomic dynamics," Working Paper Series 832, European Central Bank.
4. Cúrdia, Vasco & Reis, Ricardo, 2010. "Correlated Disturbances and U.S. Business Cycles," CEPR Discussion Papers 7712, C.E.P.R. Discussion Papers.
   
   • Vasco Cúrdia & Ricardo Reis, 2010. "Correlated disturbances and U.S. business cycles," Staff Reports 434, Federal Reserve Bank of New York.
   • Vasco Cúrdia & Ricardo Reis, 2010. "Correlated Disturbances and U.S. Business Cycles," NBER Working Papers 15774, National Bureau of Economic Research, Inc.
   • Ricardo Reis & Vasco Curdia, 2009. "Correlated Disturbances and U.S. Business Cycles," 2009 Meeting Papers 129, Society for Economic Dynamics.
   • Vasco Curdia & Ricardo Reis, 2010. "Correlated Disturbances and U.S. Business Cycles," Discussion Papers 0910-12, Columbia University, Department of Economics.
5. Ascari, Guido & Rossi, Lorenza, 2011. "Real wage rigidities and disinflation dynamics: Calvo vs. Rotemberg pricing," Economics Letters, Elsevier, vol. 110(2), pages 126-131, February.
   
   • Guido Ascari & Lorenza Rossi, 2010. "Real Wage Rigidities and Disinflation Dynamics: Calvo vs. Rotemberg Pricing," Quaderni di Dipartimento 116, University of Pavia, Department of Economics and Quantitative Methods.
6. David K. Backus & Allan W. Gregory & Stanley E. Zin, 1986. "Risk Premiums in the Term Structure : Evidence from Artificial Economies," Working Papers 665, Queen's University, Department of Economics.
   
   • Backus, David K. & Gregory, Allan W. & Zin, Stanley E., 1989. "Risk premiums in the term structure : Evidence from artificial economies," Journal of Monetary Economics, Elsevier, vol. 24(3), pages 371-399, November.
7. Ravenna , Federico & Seppälä , Juha, 2006. "Monetary policy and rejections of the expectations hypothesis," Research Discussion Papers 25/2006, Bank of Finland.
8. Talvi, Ernesto & Vegh, Carlos A., 2005. "Tax base variability and procyclical fiscal policy in developing countries," Journal of Development Economics, Elsevier, vol. 78(1), pages 156-190, October.
9. De Graeve, Ferre & Emiris, Marina & Wouters, Raf, 2009. "A structural decomposition of the US yield curve," Journal of Monetary Economics, Elsevier, vol. 56(4), pages 545-559, May.
10. Ivan Jaccard, 2010. "Asset pricing, habit memory, and the labor market," Working Paper Series 1163, European Central Bank.
    
    • Ivan Jaccard, 2007. "Asset Pricing, Habit Memory, and the Labor Market," Swiss Finance Institute Research Paper Series 07-23, Swiss Finance Institute, revised Nov 2007.

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