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The Risk Premium in New Keynesian DSGE Models: The Cost of Inflation Channel

36 Pages Posted: 9 Sep 2022

See all articles by Leonardo Iania

Leonardo Iania

Université catholique de Louvain; KU Leuven, Department Accounting, Finance and Insurance

Pavel Tretiakov

UCLouvain - UCLouvain, Louvain School of Management - Louvain Finance

Rafael Wouters

National Bank of Belgium

Multiple version iconThere are 2 versions of this paper

Date Written: August 24, 2022

Abstract

We study the role of the cost of inflation channel in determining the risk premium in a (nonlinear) New Keynesian DSGE model. Relying on a Calvo (or Rotemberg) price setting, we show that while the cost of inflation channel generates the desired term premium moments, it suffers from nontrivial, counterintuitive approximation errors in the price dispersion function. In addition to documenting the issues, we propose ways to alleviate them, in cluding a quasikinked demand function as a risk-generating mechanism.

Keywords: Macro-finance, DSGE, Term premia

JEL Classification: E31, E43, E44, E52, G12

Suggested Citation

Iania, Leonardo and Tretiakov, Pavel and Wouters, Rafael, The Risk Premium in New Keynesian DSGE Models: The Cost of Inflation Channel (August 24, 2022). Available at SSRN: https://ssrn.com/abstract=4199409 or http://dx.doi.org/10.2139/ssrn.4199409

Leonardo Iania

Université catholique de Louvain ( email )

34, Voie du roman pays
louvain la neuve, 1348
Belgium

HOME PAGE: http://https://sites.google.com/site/ianialeonardo/

KU Leuven, Department Accounting, Finance and Insurance ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

Pavel Tretiakov (Contact Author)

UCLouvain - UCLouvain, Louvain School of Management - Louvain Finance ( email )

voie du roman, 34
Louvain-la-neuve, 1348
Belgium

Rafael Wouters

National Bank of Belgium ( email )

Brussels, B-1000
Belgium
+32 2 221 5441 (Phone)
+32 2 221 3162 (Fax)

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