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Risk Premia at the ZLB: a macroeconomic interpretation

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  • Phuong Ngo

    (Cleveland State University)

  • Francois Gourio

    (Federal Reserve Bank of Chicago)

Abstract

Long-term interest rates have fallen to historically low levels since the Great Recession started. One potential contributor are low premia for infl‡ation and interest rate risk. We show how a fairly standard New Keynesian macroeconomic model generates lower infl‡ation and interest rate risk premia when the economy becomes close to the zero lower bound (ZLB). In particular, the in‡flation risk premia switches from positive to negative. We provide evidence consistent with this mechanism: since 2009, investors seem to view infl‡ation as more positively correlated with the price of risky assets.

Suggested Citation

  • Phuong Ngo & Francois Gourio, 2016. "Risk Premia at the ZLB: a macroeconomic interpretation," 2016 Meeting Papers 1585, Society for Economic Dynamics.
    • Handle: RePEc:red:sed016:1585
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    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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