Government Bond Risk Premia and the Cyclicality of Fiscal Policy

59 Pages Posted: 21 Dec 2011

See all articles by Kai Philipp Christoffel

Kai Philipp Christoffel

European Central Bank (ECB)

Ivan Jaccard

European Central Bank (ECB) - Directorate General Research

Juha Kilponen

Bank of Finland - Research

Date Written: December 8, 2011

Abstract

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

Christoffel, Kai Philipp and Jaccard, Ivan and Kilponen, Juha, Government Bond Risk Premia and the Cyclicality of Fiscal Policy (December 8, 2011). ECB Working Paper No. 1411. Available at SSRN: https://ssrn.com/abstract=1969854

Kai Philipp Christoffel (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Ivan Jaccard

European Central Bank (ECB) - Directorate General Research ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

Juha Kilponen

Bank of Finland - Research ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland
+358 10 831 2847 (Phone)
+358 10 831 2294 (Fax)

HOME PAGE: http://www.bof.fi/en/suomen_pankki/organisaatio/asiantuntijoita/kilponen_juha/

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