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Working Paper
The Decline in Asset Return Predictability and Macroeconomic Volatility
We document strong U.S. stock and bond return predictability from several macroeconomic volatility series before 1982, and a significant decline in this predictability during the Great Moderation. These findings are robust to alternative empirical specifications and out-of-sample tests. We explore the predictability decline using a model that incorporates monetary policy and shocks with time-varying volatility. The decline is consistent with changes in both policy and shock dynamics. While an increase in the response to inflation in the interest-rate policy rule decreases volatility, more ...
Working Paper
Real and Nominal Equilibrium Yield Curves: Wage Rigidities and Permanent Shocks
The links between real and nominal bond risk premia and macroeconomic dynamics are explored quantitatively in a model with nominal rigidities and monetary policy. The estimated model captures macroeconomic and yield curve properties of the U.S. economy, implying significantly positive real term and inflation risk bond premia. In contrast to previous literature, both premia are positive and generated by wage rigidities as a compensation for permanent productivity shocks. Stronger policy-rule responses to inflation (output) increase (decrease) both premia, while policy surprises generate ...
Discussion Paper
The Information in Interest Coverage Ratios of the US Nonfinancial Corporate Sector
Using firm-level data, we find significant variability in interest coverage ratios--across firms and economic sectors and across time--that suggests that critical ICR levels depend on firm- or sector-specific economic conditions.
Discussion Paper
The Relationship between Macroeconomic Overheating and Financial Vulnerability : A Narrative Investigation
In this note, we follow a narrative approach to review historical episodes of significant financial imbalances and examine whether these episodes were linked to macroeconomic overheating.