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Government bond risk premia and the cyclicality of fiscal policy

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  • Christoffel, Kai
  • Kilponen, Juha
  • Jaccard, Ivan

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. JEL Classification: E5, E6, G1

Suggested Citation

  • Christoffel, Kai & Kilponen, Juha & Jaccard, Ivan, 2011. "Government bond risk premia and the cyclicality of fiscal policy," Working Paper Series 1411, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20111411
    Note: 85234
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    References listed on IDEAS

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    Cited by:

    1. Richard K. Crump & Stefano Eusepi & Emanuel Moench, 2016. "The term structure of expectations and bond yields," Staff Reports 775, Federal Reserve Bank of New York.
    2. Zuzana Mucka & Michal Horvath, 2015. "Fiscal Policy Matters A New DSGE Model for Slovakia," Discussion Papers Discussion Paper No. 1/20, Council for Budget Responsibility.
    3. James McNeil, 2020. "Estimation of Impulse response functions with term structure local projections," Working Papers daleconwp2020-05, Dalhousie University, Department of Economics.
    4. Amisano, Gianni & Tristani, Oreste, 2019. "Uncertainty shocks, monetary policy and long-term interest rates," Working Paper Series 2279, European Central Bank.
    5. Cristina Badarau & Florence Huart & Ibrahima Sangaré, 2014. "Sovereign Risk Premium and Divergent Fiscal Policies in a Monetary Union," Revue d'économie politique, Dalloz, vol. 124(6), pages 867-898.
    6. Gianni Amisano & Oreste Tristani, 2023. "Monetary policy and long‐term interest rates," Quantitative Economics, Econometric Society, vol. 14(2), pages 689-716, May.
    7. Cristina Badarau & Florence Huart & Ibrahima Sangaré, 2021. "Households saving and financial spillovers in the Euro area," Bulletin of Economic Research, Wiley Blackwell, vol. 73(4), pages 660-687, October.
    8. Christoffel, Kai & Jaccard, Ivan & Kilponen, Juha, 2013. "Welfare and bond pricing implications of fiscal stabilization policies," Research Discussion Papers 32/2013, Bank of Finland.
    9. Paul J.J. Welfens & Samir Kadiric, 2017. "Neuere Finanzmarktaspekte von Bankenkrise, QE-Politik und EU-Bankenaufsicht," EIIW Discussion paper disbei239, Universitätsbibliothek Wuppertal, University Library.
    10. Florina-Cristina Badarau & Florence Huart & Ibrahima Sangaré, 2013. "Indebtedness and macroeconomic imbalances in a monetary-union DSGE model," Working Papers hal-00996622, HAL.
    11. Johannes Hermanus Kemp & Hylton Hollander, 2020. "A medium-sized, open-economy, fiscal DSGE model of South Africa," WIDER Working Paper Series wp-2020-92, World Institute for Development Economic Research (UNU-WIDER).
    12. Christoffel, Kai & Jaccard, Ivan & Kilponen, Juha, 2013. "Welfare and bond pricing implications of fiscal stabilization policies," Bank of Finland Research Discussion Papers 32/2013, Bank of Finland.
    13. repec:zbw:bofrdp:2013_032 is not listed on IDEAS
    14. Johannes Hermanus Kemp, 2020. "Empirical estimates of fiscal multipliers for South Africa," WIDER Working Paper Series wp-2020-91, World Institute for Development Economic Research (UNU-WIDER).

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    More about this item

    Keywords

    bond risk premium; DSGE models; fiscal policy; monetary policy;
    All these keywords.

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • G1 - Financial Economics - - General Financial Markets

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