Working Paper: NBER ID: w30921
Authors: Carolin Pflueger
Abstract: I use nominal and real bond risks as new moments to discipline a New Keynesian asset pricing model, where supply shocks, demand shocks, and monetary policy are the fundamental drivers of inflation. Endogenously time-varying risk premia imply that nominal bond risks—as measured by their stock market beta—are a forward-looking indicator of stagflation risks. Calibrating the model separately for the 1980s and the 2000s, I show that positive nominal bond betas in the 1980s resulted from a “perfect storm” of supply shocks and a reactive monetary policy rule, but not from either supply shocks or monetary policy in isolation.
Keywords: Inflation; Treasury Bonds; Monetary Policy; Supply Shocks; Demand Shocks
JEL Codes: E0; E31; E40; G10; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| quick-acting inflation-focused monetary policy + volatile supply shocks (E63) | risky nature of nominal treasury bonds in the 1980s (E43) |
| supply shocks + reactive monetary policy (E65) | positive nominal bond betas during the 1980s (E43) |
| more inertial monetary policy (E63) | protects nominal bonds from becoming risky in the 2000s (G12) |
| demand shocks (E39) | lower bond prices (G12) |
| volatile supply shocks (E32) | positive nominal bond-stock beta in the 1980s (G12) |
| 2000s calibration (Y10) | negative betas for both nominal and real bonds (E43) |