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Equilibrium Yield Curves

Listed author(s):
  • Monika Piazzesi
  • Martin Schneider

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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File URL: http://www.nber.org/papers/w12609.pdf
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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
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
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