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The bond premium in a DSGE model with long-run real and nominal risks

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Author Info
Glenn D. Rudebusch () (Federal Reserve Bank of San Francisco)
Eric T. Swanson () (Federal Reserve Bank of San Francisco)

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Abstract

The term premium on nominal long-term bonds in the standard dynamic stochastic general equilibrium (DSGE) model used in macroeconomics is far too small and stable relative to empirical measures obtained from the data - an example of the "bond premium puzzle." However, in models of endowment economies, researchers have been able to generate reasonable term premiums by assuming that investors face long-run economic risks and have recursive Epstein-Zin preferences. We show that introducing these two elements into a canonical DSGE model can also produce a large and variable term premium without compromising the model's ability to fit key macroeconomic variables.

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Paper provided by National Bank of Belgium in its series Research series with number 200810-18.

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Length: 50 pages
Date of creation: Oct 2008
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Handle: RePEc:nbb:reswpp:200810-18

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  34. Annette Vissing-Jorgensen, 2002. "Limited Asset Market Participation and the Elasticity of Intertemporal Substitution," Journal of Political Economy, University of Chicago Press, vol. 110(4), pages 825-853, August. [Downloadable!] (restricted)
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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. François Gourio, 2009. "Disasters Risk and Business Cycles," NBER Working Papers 15399, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Jardet, C. & Monfort, A. & Pegoraro, F., 2009. "No-arbitrage Near-Cointegrated VAR(p) Term Structure Models, Term Premia and GDP Growth," Documents de Travail 234, Banque de France. [Downloadable!]
  3. Maarten Dossche, 2009. "Understanding inflation dynamics : Where do we stand ?," Research series 200906-11, National Bank of Belgium. [Downloadable!]
  4. Taeyoung Doh, 2008. "Long run risks in the term structure of interest rates: estimation," Research Working Paper RWP 08-11, Federal Reserve Bank of Kansas City. [Downloadable!]
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