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Government bond risk premia and the cyclicality of fiscal policy

  • Christoffel, Kai
  • Jaccard, Ivan
  • Kilponen, Juha

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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File URL: http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1411.pdf
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Paper provided by European Central Bank in its series Working Paper Series with number 1411.

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Date of creation: Dec 2011
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Handle: RePEc:ecb:ecbwps:20111411
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  1. Hördahl, Peter & Tristani, Oreste & Vestin, David, 2007. "The yield curve and macroeconomic dynamics," Working Paper Series 0832, European Central Bank.
  2. 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.
  3. Vasco Cúrdia & Ricardo Reis, 2010. "Correlated Disturbances and U.S. Business Cycles," NBER Working Papers 15774, National Bureau of Economic Research, Inc.
  4. Glenn D. Rudebusch & Eric T. Swanson, 2008. "The bond premium in a DSGE model with long-run real and nominal risks," Working Paper Research 143, National Bank of Belgium.
  5. 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.
  6. 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.
  7. Glenn D. Rudebusch, 2010. "Macro-finance models of interest rates and the economy," Working Paper Series 2010-01, Federal Reserve Bank of San Francisco.
  8. 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.
  9. Eric M. Leeper, 2010. "Monetary science, fiscal alchemy," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 361-434.
  10. 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.
  11. Ravenna , Federico & Seppälä , Juha, 2006. "Monetary policy and rejections of the expectations hypothesis," Research Discussion Papers 25/2006, Bank of Finland.
  12. 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.
  13. Glenn D. Rudebusch & Eric T. Swanson, 2008. "Examining the bond premium puzzle with a DSGE model," Working Paper Series 2007-25, Federal Reserve Bank of San Francisco.
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