Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/153266
Authors: 
Hördahl, Peter
Tristani, Oreste
Vestin, David
Year of Publication: 
2007
Series/Report no.: 
ECB Working Paper 832
Abstract: 
We show that microfounded DSGE models with nominal rigidities can be successful in replicating features of bond yield data which have previously been considered puzzling in general equilibrium frameworks. Consistent with empirical evidence, we obtain average holding period returns that are positive, increasing in maturity and sizable, as well as long-maturity bond yields that are almost as volatile as short-term interest rates. At the same time, we are able to fit sample moments of consumption and inflation relatively well. To improve our understanding of these results, we derive analytical solutions for yields that are valid up to a second order approximation and generally applicable, We demonstrate that the improved model performance does not arise directly from the presence of nominal rigidities: ceteris paribus, the introduction of sticky-prices in a simple model tend to reduce premia. Sticky prices help indirectly because they imply (short-run) monetary non-neutrality, so that the policy rule followed by the central bank affects consumption dynamics and the pricing of yields. A very high degree of “interest rate smoothing” in the policy rule is essential for our results.
Subjects: 
DSGE Models
policy rules
risk premia
second order approximations
Term structure of interest rates
JEL: 
E43
E44
Document Type: 
Working Paper

Files in This Item:
File
Size





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