Nominal Rigidities and the Term Structures of Equity and Bond Returns

Posted: 9 Jul 2021

See all articles by Pier Lopez

Pier Lopez

affiliation not provided to SSRN

David Lopez-Salido

Board of Governors of the Federal Reserve System

Francisco Vazquez-Grande

Board of Governors of the Federal Reserve System

Date Written: June, 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.

JEL Classification: E43, E44, G12

Suggested Citation

Lopez, Pier and Lopez-Salido, David and Vazquez-Grande, Francisco, Nominal Rigidities and the Term Structures of Equity and Bond Returns (June, 2015). FEDS Working Paper No. 2015-64, Available at SSRN: https://ssrn.com/abstract=3882332

Pier Lopez (Contact Author)

affiliation not provided to SSRN

No Address Available

David Lopez-Salido

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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