Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/244301 
Year of Publication: 
2020
Series/Report no.: 
Working Paper No. 2020-20
Publisher: 
Federal Reserve Bank of Atlanta, Atlanta, GA
Abstract: 
We present a theory in which limited risk sharing of idiosyncratic labor income risk plays a key role in determining the dynamics of interest rates. Our production-based model relates the crosssectional distribution of labor income risk to observable aggregate labor market variables. Our model makes two key predictions. First, it predicts positive risk premia for long-term bonds while simultaneously matching key macroeconomic moments. Second, it predicts a negative correlation between current labor market conditions (as measured by labor market tightness or the job-finding rate) and future bond excess returns. We provide evidence for these predictions.
Subjects: 
interest rates
nondiversifiable labor income risk
labor market frictions
bond risk premia
JEL: 
E24
E43
E44
G12
J64
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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