Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/244300 
Year of Publication: 
2020
Series/Report no.: 
Working Paper No. 2020-19
Publisher: 
Federal Reserve Bank of Atlanta, Atlanta, GA
Abstract: 
We incorporate regime switching between monetary and fiscal policies in a general equilibrium model to explain three stylized facts: (1) the positive stock-bond return correlation from 1971 to 2000 and the negative one after 2000, (2) the negative correlation between consumption and inflation from 1971 to 2000 and the positive one after 2000, and (3) the coexistence of positive bond risk premiums and the negative stock-bond return correlation. We show that two distinctive shocks-the technology and investment shocks-drive positive and negative stock-bond return correlations under two policy regimes, but positive bond risk premiums are driven by the same technology shock.
Subjects: 
stock-bond return correlation
consumption-inflation correlation
fiscal-monetary policy regime
bond risk premium
technology shock
investment shock
JEL: 
G12
G18
E52
E62
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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