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The Real Channel for Nominal Bond-Stock Puzzles

Author

Listed:
  • Mikhail Chernov
  • Lars A. Lochstoer
  • Dongho Song
Abstract
We present evidence that the mix of transitory and permanent shocks to consumption is changing over time. We identify three regimes: two highly persistent regimes where either permanent or transitory shocks are relatively more dominant, and a disaster regime that is largely transitory. We study implications of this finding for asset prices. The transition from the second to the first regime in the mid-1990s makes the correlation between equities and bonds switch sign from positive to negative as in the data. The real bond and equity yield curves are approximately flat. The nominal bond curve is upward sloping. These results are achieved without relying on the nominal channel too much. That is, as in the data, the variation of inflation in the model is under 40% as a fraction of variation in nominal yields.

Suggested Citation

  • Mikhail Chernov & Lars A. Lochstoer & Dongho Song, 2021. "The Real Channel for Nominal Bond-Stock Puzzles," NBER Working Papers 29085, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:29085
    Note: AP EFG
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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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