The Bond Premium in a DSGE Model with Long-Run Real and Nominal Risks

National Bank of Belgium Working Paper No. 143

50 Pages Posted: 2 Oct 2010

See all articles by Glenn D. Rudebusch

Glenn D. Rudebusch

Federal Reserve Bank of San Francisco

Eric T. Swanson

University of California, Irvine - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: October 16, 2008

Abstract

The term premium on nominal long-term bonds in the standard dynamic stochastic general equilibrium (DSGE) model used in macroeconomics is far too small and stable relative to empirical measures obtained from the data - an example of the "bond premium puzzle." However, in models of endowment economies, researchers have been able to generate reasonable term premiums by assuming that investors face long-run economic risks and have recursive Epstein-Zin preferences. We show that introducing these two elements into a canonical DSGE model can also produce a large and variable term premium without compromising the model's ability to fit key macroeconomic variables.

Suggested Citation

Rudebusch, Glenn D. and Swanson, Eric T., The Bond Premium in a DSGE Model with Long-Run Real and Nominal Risks (October 16, 2008). National Bank of Belgium Working Paper No. 143, Available at SSRN: https://ssrn.com/abstract=1685158 or http://dx.doi.org/10.2139/ssrn.1685158

Glenn D. Rudebusch (Contact Author)

Federal Reserve Bank of San Francisco ( email )

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Eric T. Swanson

University of California, Irvine - Department of Economics ( email )

University of California, Irvine
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HOME PAGE: http://www.ericswanson.org

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