Advanced Search
MyIDEAS: Login to save this paper or follow this series

Equilibrium Yield Curves

Contents:

Author Info

  • Monika Piazzesi
  • Martin Schneider

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.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.nber.org/papers/w12609.pdf
Download Restriction: no

Bibliographic Info

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

as in new window
Length:
Date of creation: Oct 2006
Date of revision:
Publication status: published as Acemoglu, Daron, Kenneth Rogoff, and Michael Woodford (eds.) NBER Macroeconomics Annual 2006. Cambridge MA: MIT Press, 2007.
Handle: RePEc:nbr:nberwo:12609

Note: AP EFG ME
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Phone: 617-868-3900
Email:
Web page: http://www.nber.org
More information through EDIRC

Related research

Keywords:

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

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.:
as in new window
  1. John Y. Campbell & Luis M. Viceira, 2000. "Who Should Buy Long-Term Bonds?," Harvard Institute of Economic Research Working Papers 1895, Harvard - Institute of Economic Research.
  2. Kozicki, Sharon & Tinsley, P. A., 2001. "Shifting endpoints in the term structure of interest rates," Journal of Monetary Economics, Elsevier, Elsevier, vol. 47(3), pages 613-652, June.
  3. Fernando Alvarez & Andrew Atkeson & Patrick J. Kehoe, 2005. "Time-varying risk, interest rates and exchange rates in general equilibrium," Working Papers, Federal Reserve Bank of Minneapolis 627, Federal Reserve Bank of Minneapolis.
  4. John Y. Campbell, 1987. "Bond and Stock Returns in a Simple Exchange Model," NBER Working Papers 1509, National Bureau of Economic Research, Inc.
  5. Ang, Andrew & Piazzesi, Monika & Wei, Min, 2006. "What does the yield curve tell us about GDP growth?," Journal of Econometrics, Elsevier, Elsevier, vol. 131(1-2), pages 359-403.
  6. John Y. Campbell, 1995. "Understanding Risk and Return," Harvard Institute of Economic Research Working Papers 1711, Harvard - Institute of Economic Research.
  7. Piazzesi, Monika & Schneider, Martin & Tuzel, Selale, 2007. "Housing, consumption and asset pricing," Journal of Financial Economics, Elsevier, Elsevier, vol. 83(3), pages 531-569, March.
  8. Eva Carceles Poveda & Chryssi Giannitsarou, 2006. "Asset pricing with adaptive learning," Computing in Economics and Finance 2006, Society for Computational Economics 25, Society for Computational Economics.
  9. Marcet, A. & Nicolini, J.P., 1997. "Recurrent Hyperinflations and Learning," Papers, Centro de Estudios Monetarios Y Financieros- 9721, Centro de Estudios Monetarios Y Financieros-.
  10. Shiller, Robert & Campbell, John, 1991. "Yield Spreads and Interest Rate Movements: A Bird's Eye View," Scholarly Articles 3221490, Harvard University Department of Economics.
  11. Peter Hördahl & Oreste Tristani & David Vestin, 2008. "The Yield Curve and Macroeconomic Dynamics," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 118(533), pages 1937-1970, November.
  12. Antonio Moreno & Geert Bekaert & Seonghoon Cho, 2004. "New-Keynesian Macroeconomics and the Term Structure," 2004 Meeting Papers 388, Society for Economic Dynamics.
  13. Evans, Charles L. & Marshall, David A., 1998. "Monetary policy and the term structure of nominal interest rates: Evidence and theory," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 49(1), pages 53-111, December.
  14. Lars Peter Hansen & John C. Heaton & Nan Li, 2008. "Consumption Strikes Back? Measuring Long-Run Risk," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 116(2), pages 260-302, 04.
  15. Campbell, John Y, 1993. "Intertemporal Asset Pricing without Consumption Data," American Economic Review, American Economic Association, American Economic Association, vol. 83(3), pages 487-512, June.
  16. Thomas Sargent & Noah Williams & Tao Zha, 2006. "The conquest of South American inflation," Working Paper, Federal Reserve Bank of Atlanta 2006-20, Federal Reserve Bank of Atlanta.
  17. Glenn Rudebusch & Tao Wu, 2004. "A macro-finance model of the term structure, monetary policy, and the economy," Proceedings, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, issue Mar.
  18. Beechey, Meredith, 2004. "Excess Sensitivity and Volatility of Long Interest Rates: The Role of Limited Information in Bond Markets," Working Paper Series 173, Sveriges Riksbank (Central Bank of Sweden).
  19. Jacob Boudoukh, 1993. "An equilibrium model of nominal bond prices with inflation-output correlation and stochastic volatility," Proceedings, Federal Reserve Bank of Cleveland, Federal Reserve Bank of Cleveland, pages 636-680.
  20. Andrew B. Abel, 1998. "Risk Premia and Term Premia in General Equilibrium," NBER Working Papers 6683, National Bureau of Economic Research, Inc.
  21. Eva Carceles-Poveda & Chryssi Giannitsarou, 2007. "Online Appendix to Asset Pricing with Adaptive Learning," Technical Appendices carceles08, Review of Economic Dynamics.
  22. Refet S. Gürkaynak & Brian Sack & Eric Swanson, 2003. "The excess sensitivity of long-term interest rates: evidence and implications for macroeconomic models," Proceedings, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, issue Mar.
  23. Monika Piazzesi & Martin Schneider, 2009. "Inflation and the price of real assets," Staff Report, Federal Reserve Bank of Minneapolis 423, Federal Reserve Bank of Minneapolis.
  24. Chapman, David A., 1997. "The cyclical properties of consumption growth and the real term structure," Journal of Monetary Economics, Elsevier, Elsevier, vol. 39(2), pages 145-172, July.
  25. Campbell, John Y., 1999. "Asset prices, consumption, and the business cycle," Handbook of Macroeconomics, Elsevier, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 19, pages 1231-1303 Elsevier.
  26. John Y. Campbell & John H. Cochrane, 1994. "By force of habit: a consumption-based explanation of aggregate stock market behavior," Working Papers 94-17, Federal Reserve Bank of Philadelphia.
  27. Brandt, Michael W. & Wang, Kevin Q., 2003. "Time-varying risk aversion and unexpected inflation," Journal of Monetary Economics, Elsevier, Elsevier, vol. 50(7), pages 1457-1498, October.
  28. David K. Backus & Allan W. Gregory & Stanley E. Zin, 1986. "Risk Premiums in the Term Structure : Evidence from Artificial Economies," Working Papers, Queen's University, Department of Economics 665, Queen's University, Department of Economics.
  29. Fama, Eugene F & Bliss, Robert R, 1987. "The Information in Long-Maturity Forward Rates," American Economic Review, American Economic Association, American Economic Association, vol. 77(4), pages 680-92, September.
  30. Timothy Cogley & Thomas J. Sargent, 2002. "Evolving Post-World War II U.S. Inflation Dynamics," NBER Chapters, in: NBER Macroeconomics Annual 2001, Volume 16, pages 331-388 National Bureau of Economic Research, Inc.
  31. Fernando Restoy & Philippe Weil, 2011. "Approximate Equilibrium Asset Prices," Review of Finance, European Finance Association, European Finance Association, vol. 15(1), pages 1-28.
  32. Andrew Ang & Geert Bekaert & Min Wei, 2006. "Do macro variables, asset markets, or surveys forecast inflation better?," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2006-15, Board of Governors of the Federal Reserve System (U.S.).
  33. Epstein, Larry G & Zin, Stanley E, 1989. "Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: A Theoretical Framework," Econometrica, Econometric Society, Econometric Society, vol. 57(4), pages 937-69, July.
  34. Bansal, Ravi & Coleman, Wilbur John, II, 1996. "A Monetary Explanation of the Equity Premium, Term Premium, and Risk-Free Rate Puzzles," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 104(6), pages 1135-71, December.
  35. Boudoukh, Jacob, 1993. "An Equilibrium Model of Nominal Bond Prices with Inflation-Output Correlation and Stochastic Volatility," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 25(3), pages 636-65, August.
  36. Martin D. D. Evans, 1998. "Real Rates, Expected Inflation, and Inflation Risk Premia," Journal of Finance, American Finance Association, American Finance Association, vol. 53(1), pages 187-218, 02.
  37. Fernando Alvarez & Andrew Atkeson & Patrick J. Kehoe, 1999. "Money and Interest Rates with Endogeneously Segmented Markets," NBER Working Papers 7060, National Bureau of Economic Research, Inc.
  38. Duffie, Darrell & Epstein, Larry G, 1992. "Stochastic Differential Utility," Econometrica, Econometric Society, Econometric Society, vol. 60(2), pages 353-94, March.
  39. Refet S. Gürkaynak & Brian Sack & Eric Swanson, 2005. "The Sensitivity of Long-Term Interest Rates to Economic News: Evidence and Implications for Macroeconomic Models," American Economic Review, American Economic Association, American Economic Association, vol. 95(1), pages 425-436, March.
  40. Timothy Cogley, 2005. "Changing Beliefs and the Term Structure of Interest Rates: Cross-Equation Restrictions with Drifting Parameters," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(2), pages 420-451, April.
  41. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "A Theory of the Term Structure of Interest Rates," Econometrica, Econometric Society, Econometric Society, vol. 53(2), pages 385-407, March.
  42. Fuhrer, Jeffrey C, 1996. "Monetary Policy Shifts and Long-Term Interest Rates," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 111(4), pages 1183-1209, November.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:12609. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.