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Risk Premia at the ZLB: a macroeconomic interpretation

Listed author(s):
  • Phuong Ngo

    (Cleveland State University)

  • Francois Gourio

    (Federal Reserve Bank of Chicago)

Long-term interest rates have fallen to historically low levels since the Great Recession started. One potential contributor are low premia for infl‡ation and interest rate risk. We show how a fairly standard New Keynesian macroeconomic model generates lower infl‡ation and interest rate risk premia when the economy becomes close to the zero lower bound (ZLB). In particular, the in‡flation risk premia switches from positive to negative. We provide evidence consistent with this mechanism: since 2009, investors seem to view infl‡ation as more positively correlated with the price of risky assets.

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File URL: https://economicdynamics.org/meetpapers/2016/paper_1585.pdf
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Paper provided by Society for Economic Dynamics in its series 2016 Meeting Papers with number 1585.

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Date of creation: 2016
Handle: RePEc:red:sed016:1585
Contact details of provider: Postal:
Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/
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  1. Ben S. Bernanke & Kenneth N. Kuttner, 2005. "What Explains the Stock Market's Reaction to Federal Reserve Policy?," Journal of Finance, American Finance Association, vol. 60(3), pages 1221-1257, 06.
  2. Glenn D. Rudebusch & Eric T. Swanson, 2012. "The Bond Premium in a DSGE Model with Long-Run Real and Nominal Risks," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(1), pages 105-143, January.
  3. Fernández-Villaverde, Jesús & Gordon, Grey & Guerrón-Quintana, Pablo & Rubio-Ramírez, Juan F., 2015. "Nonlinear adventures at the zero lower bound," Journal of Economic Dynamics and Control, Elsevier, vol. 57(C), pages 182-204.
  4. Eric Swanson, 2015. "A Macroeconomic Model of Equities and Real, Nominal, and Defaultable Debt," 2015 Meeting Papers 273, Society for Economic Dynamics.
  5. Li, Erica X.N. & Palomino, Francisco, 2014. "Nominal rigidities, asset returns, and monetary policy," Journal of Monetary Economics, Elsevier, vol. 66(C), pages 210-225.
  6. Phuong Ngo & Jianjun Miao, 2015. "Does Calvo Meet Rotemberg at the Zero Lower Bound?," 2015 Meeting Papers 602, Society for Economic Dynamics.
  7. Yuriy Gorodnichenko & Michael Weber, 2016. "Are Sticky Prices Costly? Evidence from the Stock Market," American Economic Review, American Economic Association, vol. 106(1), pages 165-199, January.
  8. Francisco Palomino, 2012. "Bond Risk Premiums and Optimal Monetary Policy," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(1), pages 19-40, January.
  9. Michael Weber, 2014. "Nominal Rigidities and Asset Pricing," 2014 Meeting Papers 53, Society for Economic Dynamics.
  10. Abel, Andrew B., 1999. "Risk premia and term premia in general equilibrium," Journal of Monetary Economics, Elsevier, vol. 43(1), pages 3-33, February.
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