April 2016

Real and Nominal Equilibrium Yield Curves: Wage Rigidities and Permanent Shocks

Alex Hsu, Erica X.N. Li, and Francisco Palomino


The links between real and nominal bond risk premia and macroeconomic dynamics are explored quantitatively in a model with nominal rigidities and monetary policy. The estimated model captures macroeconomic and yield curve properties of the U.S. economy, implying significantly positive real term and inflation risk bond premia. In contrast to previous literature, both premia are positive and generated by wage rigidities as a compensation for permanent productivity shocks. Stronger policy-rule responses to inflation (output) increase (decrease) both premia, while policy surprises generate negligible risk premia. Empirical evidence of the economic mechanism is provided.

Accessible materials (.zip)

Keywords: Bond risk premia, Monetary policy, Nominal rigidities, Yield curve

DOI: http://dx.doi.org/10.17016/FEDS.2016.032

PDF: Full Paper

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Last Update: June 19, 2020