Government Bond Risk Premia and the Cyclicality of Fiscal Policy
59 Pages Posted: 21 Dec 2011
Date Written: December 8, 2011
We introduce a specification of habit formation featuring non-separability between consumption and leisure into an otherwise standard New Keynesian model. The model can be estimated with standard Bayesian techniques and the bond pricing implications are evaluated using higher-order approximations. The model is able to reproduce a sizeable risk premium on long-term bonds and the cyclicality of fiscal policy has an impact on the bond premium that is quantitatively important. Technology, government spending, and mark-up shocks are the main drivers of the time-variation in bond premia.
Keywords: DSGE models, fiscal policy, bond risk premium, monetary policy
JEL Classification: E5, E6, G1
Suggested Citation: Suggested Citation