What do Nominal Rigidities and Monetary Policy tell us about the Real Yield Curve?

We study term and inflation risk premia in real and nominal bonds, respectively, in an equilibrium model calibrated to United States data. Nominal wage and price rigidities, and an interest-rate monetary policy rule characterize our model economy. Wage rigidities induce positive term and inflation risk premia for permanent productivity shocks: they generate high marginal utility, expected consumption growth, inflation, and bond yields, simultaneously. Policy and inflation-target shocks increase real and nominal yield variability, respectively. Real-nominal bond return correlations are increased by the rigidities. Stronger policy responses to output and inflation reduce real term premia and increase inflation risk premia.

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