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Interest Rate Rules, Rigidities and Inflation Risks in a Macro-Finance Model

Author

Listed:
  • Roman Horvath

    (Charles University, Prague)

  • Lorant Kaszab

    (Magyar Nemzeti Bank (Central Bank of Hungary))

  • Ales Marsal

    (National Bank of Slovakia)

Abstract

Long-term bond yields contain a risk-premium, an important part of which is compensation for inflation risks. The substantial increase in the Fed funds rate in the mid-2000s did not raise long-term US Treasury yields due to the reduction in the term premium (so-called Greenspan conundrum) which was typically thought to be exogenous for monetary policy. We show using a New Keynesian macro-finance model that the term premium is endogenous and is greatly influenced by the specification of the Taylor rule. Finally, we extend the model with frictions (richer fiscal setup and wage rigidity) that are known to help jointly match macro and finance data and estimate the model on US data in 1961-2007 by the generalized methods of moments and simulated methods of moments.

Suggested Citation

  • Roman Horvath & Lorant Kaszab & Ales Marsal, 2021. "Interest Rate Rules, Rigidities and Inflation Risks in a Macro-Finance Model," MNB Working Papers 2021/2, Magyar Nemzeti Bank (Central Bank of Hungary).
    • Handle: RePEc:mnb:wpaper:2021/2
    as

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    File URL: https://www.mnb.hu/letoltes/mnb-wp-2021-2-final-1.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    zero-coupon bond; nominal term premium; inflation risk; Taylor rule; New Keynesian; labor income taxation; wage rigidity; GMM; SMM;
    All these keywords.

    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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