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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 ...