Bond pricing with a time-varying price of risk in an estimated medium-scale bayesian DSGE model

Ian Dew-Becker*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

15 Scopus citations

Abstract

New Keynesian model in which households have Epstein-Zin preferences with time-varying risk aversion and the central bank has a time-varying inflation target can match the dynamics of nominal bond prices in the U.S. economy well. The model generates a large steady-state term spread and its fitting errors for bond yields are comparable to those obtained from a nonstructural three-factor model, and one-third smaller than in models with a constant inflation target or risk aversion. Including data on interest rates has large effects on variance decompositions, making investment technology shocks much less important than found in other recent papers.

Original languageEnglish (US)
Pages (from-to)837-888
Number of pages52
JournalJournal of Money, Credit and Banking
Volume46
Issue number5
DOIs
StatePublished - Aug 2014

Keywords

  • Bayesian estimation
  • Dynamic stochastic general equilibrium
  • Habit formation
  • Term structure

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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