Search Results
Working Paper
Nominal Rigidities and the Term Structures of Equity and Bond Returns
A downward-sloping term structure of equity and upward-sloping term structures of interest rates arise endogenously in a general-equilibrium model with nominal rigidities and nonlinear habits in consumption. Countercyclical marginal costs exacerbate the procyclicality of dividends after a technology shock, and hence their riskiness, and generate countercyclical inflation. Marginal costs gradually fall after a negative technology shock as the price level increases sluggishly, so the payoffs of short-duration dividend claims (bonds) are more (less) procyclical than the payoffs of long-duration ...
Discussion Paper
Out-of-Sample Performance of Recession Probability Models
This note discusses the out-of-sample (OOS) performance of several probit models used to assess the likelihood that the U.S. economy will be in a recession within the following year.
Working Paper
More than Words: Twitter Chatter and Financial Market Sentiment
We build a new measure of credit and financial market sentiment using Natural Language Processing on Twitter data. We find that the Twitter Financial Sentiment Index (TFSI) correlates highly with corporate bond spreads and other price- and survey-based measures of financial conditions. We document that overnight Twitter financial sentiment helps predict next day stock market returns. Most notably, we show that the index contains information that helps forecast changes in the U.S. monetary policy stance: a deterioration in Twitter financial sentiment the day ahead of an FOMC statement release ...
Working Paper
Accounting for Risk in a Linearized Solution: How to Approximate the Risky Steady State and Around It
We propose a novel approximation of the risky steady state and construct first-order perturbations around it for a general class of dynamic equilibrium models with time-varying and non-Gaussian risk. We offer analytical formulas and conditions for their local existence and uniqueness. We apply this approximation technique to models featuring Campbell-Cochrane habits, recursive preferences, and time-varying disaster risk, and show how the proposed approximation represents the implications of the model similarly to global solution methods. We show that our approximation of the risky steady ...
Newsletter
Sources of Fluctuation in Short-Term Yields and Recession Probabilities
An inverted yield curve—defined as an episode in which long-maturity Treasury yields fall below their short-maturity counterparts—is a powerful near-term predictor of recessions. While most previous studies focus on the predictive power of the spread between the long- and short-term Treasury yields, Engstrom and Sharpe (2019) have recently shown that a measure of the nominal near-term forward spread (NTFS), given by the difference between the six-quarter-ahead forward Treasury yield and the current three-month Treasury bill rate, dominates long-term spreads as a leading indicator of ...
Discussion Paper
The Stock Market–Real Economy "Disconnect": A Closer Look
Between March and September 2020, broad equity price indexes around the world experienced a historic rally. Although this rally followed a significant decline in stock prices, it appears difficult to explain due to continuing concerns about the global pandemic and national economies running far below their potentials.
Working Paper
Measuring the Natural Rate of Interest : A Note on Transitory Shocks
We present evidence that the natural rate of interest is buffeted by both permanent and transitory shocks. We establish this result by estimating a benchmark model with Bayesian methods and loose priors on the unobserved drivers of the natural rate. When subject to transitory shocks, the median estimate for the U.S. economy is more procyclical, displays a less marked secular decline, and is therefore higher following the Great Recession than most estimates in the literature.
Working Paper
Nominal Rigidities and the Term Structures of Equity and Bond Returns
We present a production economy with nominal price rigidities that explains several asset pricing facts, including a downward-sloping term structure of the equity premium, upward sloping term structures of nominal and real interest rates, and the cyclical variation of the term structures. In the model, after a productivity shock a countercyclical labor share exacerbates the procyclicality of dividends, and hence their riskiness, and generates countercyclical inflation. The dividend share gradually increases after a negative productivity shock as the price level increases sluggishly, so the ...
Discussion Paper
Convenience Yield as a Driver of r*
The natural rate of interest, or r*, corresponds to the short-term real interest rate that is consistent with full employment and price stability, after all temporary shocks have abated. The most popular framework to estimate r* is Laubach and Williams (2003) and Holston, Laubach, and Williams (2017, 2023) (henceforth HLW).