EconStor >
Cardiff University >
Cardiff Business School, Cardiff University >
Cardiff Economics Working Papers, Cardiff Business School, Cardiff University >

Please use this identifier to cite or link to this item:
Title:A credit-banking explanation of the equity premium, term premium, and risk-free rate puzzles PDF Logo
Authors:Scheffel, Eric
Issue Date:2008
Series/Report no.:Cardiff Economics Working Papers E2008/30
Abstract:Micro-founded de-centralized financial intermediation in a cash and costly-credit model(see Gillman and Kejak, 2008) results in a cost-distortion of returns implying a lower average nominal and real risk-free rate when compared to standard cash-in-advance RBC models. Failure of both short-run and long-run Fisher equation relationships based on observable real and nominal rates and inflation are obtained. The cost-distortion also leads to an unconditionally upward-sloping average yield curve of interest rates which is also convex in shape. The model is capable of producing a positive correlation between the nominal rate and velocity, and a negative correlation between the ex-post real rate and inflation. More importantly, the model also predicts a negative correlation between the ex-ante real rate and the ex-ante expected rate of inflation. Finally, the conditional spread between the usual CCAPM rate as defined by Canzoneri and Diba (2005) and the model-implied money market rate is positively correlated with the stance of monetary policy, offering a new perspective on this systematic link recently studied empirically by Canzoneri et al. (2007a) and theoretically by Canzoneri and Diba (2005).
Subjects:Business Cycles
Term Structure of Interest Rates
Document Type:Working Paper
Appears in Collections:Cardiff Economics Working Papers, Cardiff Business School, Cardiff University

Files in This Item:
File Description SizeFormat
591188287.pdf858.96 kBAdobe PDF
No. of Downloads: Counter Stats
Download bibliographical data as: BibTeX
Share on:

Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.