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Back to the 1980s or Not? The Drivers of Inflation and Real Risks in Treasury Bonds

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  • Carolin Pflueger

Abstract

I use nominal and real bond risks as new moments to discipline a New Keynesian asset pricing model, where supply shocks, demand shocks, and monetary policy are the fundamental drivers of inflation. Endogenously time-varying risk premia imply that nominal bond risks—as measured by their stock market beta—are a forward-looking indicator of stagflation risks. Calibrating the model separately for the 1980s and the 2000s, I show that positive nominal bond betas in the 1980s resulted from a “perfect storm” of supply shocks and a reactive monetary policy rule, but not from either supply shocks or monetary policy in isolation.

Suggested Citation

  • Carolin Pflueger, 2023. "Back to the 1980s or Not? The Drivers of Inflation and Real Risks in Treasury Bonds," NBER Working Papers 30921, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:30921
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    Cited by:

    1. Mouabbi, Sarah & Renne, Jean-Paul & Sahuc, Jean-Guillaume, 2024. "Debt-stabilizing properties of GDP-linked securities: A macro-finance perspective," Journal of Banking & Finance, Elsevier, vol. 162(C).
    2. Ben Knox & Yannick Timmer, 2024. "Stagflationary Stock Returns," CESifo Working Paper Series 11236, CESifo.

    More about this item

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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