Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/146622 
Year of Publication: 
2015
Series/Report no.: 
MNB Working Papers No. 2015/1
Publisher: 
Magyar Nemzeti Bank, Budapest
Abstract: 
We introduce costly firm-entry a la Bilbiie et al. (2012) into a New Keynesian model with Epstein-Zin preferences and show that it can jointly account for a high mean value of bond and equity premium without compromising the fit of the model to first and second moments of key macroeconomic variables. In the standard New Keynesian model without entry it is easy to generate inflation risks on long-term nominal bonds when placing high coefficient on the output gap in the Taylor rule. Our model is able to generate inflation risks when the coefficient on the output gap is small. In the entry model real risks are lower and inflation risks are ceteris paribus higher than in the standard New Keynesian model without entry due to the appearance of new varieties that help households smooth their consumption better.
Subjects: 
firm entry
zero-coupon bond
equity premium
nominal term premium
third-order approximation
New Keynesian
Epstein-Zin preferences
JEL: 
E13
E31
E43
E44
E62
Document Type: 
Working Paper

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