Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/144356
Authors: 
Rudebusch, Glenn D.
Swanson, Eric T.
Year of Publication: 
2008
Series/Report no.: 
Working Paper Research 143
Abstract: 
The term premium on nominal long-term bonds in the standard dynamic stochastic general equilibrium (DSGE) model used in macroeconomics is far too small and stable relative to empirical measures obtained from the data - an example of the "bond premium puzzle." However, in models of endowment economies, researchers have been able to generate reasonable term premiums by assuming that investors face long-run economic risks and have recursive Epstein-Zin preferences. We show that introducing these two elements into a canonical DSGE model can also produce a large and variable term premium without compromising the model's ability to fit key macroeconomic variables.
Document Type: 
Working Paper

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