Habits die hard: implications for bond and stock markets internationally

This paper assesses whether the global fall in inflation expectations together with increased fear of recession, the economic mechanism that drives asset prices in a model with consumption habits, help to explain the downward trajectory in nominal government bond yields and the stock price dynamics of six major economies from 1988 until 2019. We calibrate the habit model for each country separately. For most countries, focusing the calibrations on matching average ten-year government bond yields allows one to generate articifical time series of bond yields and price-consumption ratios that follow the long-run time series patterns of their counterparts in the data.