Template-Type: ReDIF-Paper 1.0
Author-Name: Lorant Kaszab
Author-X-Name-First: Lorant
Author-X-Name-Last: Kaszab
Author-Email: kaszabl@mnb.hu
Author-Workplace-Name: Magyar Nemzeti Bank (the Central Bank of Hungary)
Author-Name: Ales Marsal
Author-X-Name-First: Ales
Author-X-Name-Last: Marsal
Author-Email: ales.marsal@seznam.cz
Author-Workplace-Name: National Bank of Slovakia
Title: Explaining Bond and Equity Premium Puzzles Jointly in a DSGE Model
Abstract: We introduce costly firm-entry a la Bilbiie et al. (2012) into a New Keynesian model with Epstein-Zin preferences and show
that it can jointly account for a high mean value of bond and equity premium without compromising the fit of the model to
first and second moments of key macroeconomic variables. In the standard New Keynesian model without entry it is easy to
generate inflation risks on long-term nominal bonds when placing high coefficient on the output gap in the Taylor rule. Our
model is able to generate inflation risks when the coefficient on the output gap is small. In the entry model real risks are lower
and inflation risks are ceteris paribus higher than in the standard New Keynesian model without entry due to the appearance
of new varieties that help households smooth their consumption better.
Length: 38 pages
Creation-Date: 2015
File-URL: http://www.mnb.hu/letoltes/wp-2015-1-final-1.pdf
File-Format: Application/pdf
Number: 2015/1
Classification-JEL: E13, E31, E43, E44, E62.
Keywords: firm entry, zero-coupon bond, equity premium, nominal term premium, third-order approximation, New Keynesian,
Epstein-Zin preferences.
Handle: RePEc:mnb:wpaper:2015/1