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Equilibrium Yield Curves

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Author Info
Monika Piazzesi
Martin Schneider

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Abstract

This paper considers how the role of inflation as a leading business-cycle indicator affects the pricing of nominal bonds. We examine a representative agent asset pricing model with recursive utility preferences and exogenous consumption growth and inflation. We solve for yields under various assumptions on the evolution of investor beliefs. If inflation is bad news for consumption growth, the nominal yield curve slopes up. Moreover, the level of nominal interest rates and term spreads are high in times when inflation news are harder to interpret. This is relevant for periods such as the early 1980s, when the joint dynamics of inflation and growth was not well understood.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12609.

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Date of creation: Oct 2006
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Handle: RePEc:nbr:nberwo:12609

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Find related papers by JEL classification:
E0 - Macroeconomics and Monetary Economics - - General
E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
G0 - Financial Economics - - General
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing

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