Nominal Rigidities and the Term Structures of Equity and Bond Returns

FEDS Working Paper No. 2015-064

http://dx.doi.org/10.17016/FEDS.2015.064

45 Pages Posted: 25 Aug 2015

See all articles by Pierlauro Lopez

Pierlauro Lopez

Banque de France

David Lopez-Salido

Board of Governors of the Federal Reserve System

Francisco Vazquez-Grande

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: June 30, 2015

Abstract

A downward-sloping term structure of equity and upward-sloping term structures of interest rates arise endogenously in a general-equilibrium model with nominal rigidities and nonlinear habits in consumption. Countercyclical marginal costs exacerbate the procyclicality of dividends after a technology shock, and hence their riskiness, and generate countercyclical inflation. Marginal costs gradually fall after a negative technology shock as the price level increases sluggishly, so the payoffs of short-duration dividend claims (bonds) are more (less) procyclical than the payoffs of long-duration claims (bonds). The simultaneous presence of market and home consumption habits allows for uniting nonlinear habits and a production economy without compromising the ability of the model to fit macroeconomic variables.

Keywords: Equity and bond yields, Habit formation, Nominal rigidities, Structural term structure modeling

JEL Classification: E43, E44, G12

Suggested Citation

Lopez, Pierlauro and Lopez-Salido, David and Vazquez-Grande, Francisco, Nominal Rigidities and the Term Structures of Equity and Bond Returns (June 30, 2015). http://dx.doi.org/10.17016/FEDS.2015.064. Available at SSRN: https://ssrn.com/abstract=2650658 or http://dx.doi.org/10.2139/ssrn.2650658

Pierlauro Lopez

Banque de France ( email )

Paris
France

David Lopez-Salido (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Francisco Vazquez-Grande

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
202-973-7488 (Phone)

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