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Arbitrage-free bond pricing with dynamic macroeconomic models
The authors examine the relationship between changes in short-term interest rates induced by monetary policy and the yields on long-maturity default-free bonds. The volatility of the long end of the term structure and its relationship with monetary policy are puzzling from the perspective of simple structural macroeconomic models. The authors explore whether richer models of risk premiums, specifically stochastic volatility models combined with Epstein-Zin recursive utility, can account for such patterns. They study the properties of the yield curve when inflation is an exogenous process and ...
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 ...
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.
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.
The Relationship between Macroeconomic Overheating and Financial Vulnerability : A Quantitative Exploration
In this note, we explore the link between indicators of financial imbalances and macroeconomic performance, focusing on the experience of the United States. In an accompanying note, The Relationship between Macroeconomic Overheating and Financial Vulnerability: A Narrative Investigation, we follow a narrative approach to review historical episodes of significant financial imbalances and examine whether these episodes were linked to macroeconomic overheating.
The Potential Increase in Corporate Debt Interest Rate Payments from Changes in the Federal Funds Rate
This note studies the response of interest expenses of U.S. nonfinancial corporations to an increase in interest rates.
Interest Coverage Ratios: Assessing Vulnerabilities in Nonfinancial Corporate Credit
This note examines whether the ability of nonfinancial corporations to meet their interest expenses out of earnings is a vulnerability for financial stability under current economic conditions. We measure this ability using the interest coverage ratio (ICR)—the ratio of earnings before interest and taxes relative to interest expenses—and project this ratio under different scenarios.
Corporate Bond Issuers' Swap Exposure to Rising Interest Rates
United States corporate bond issuance has been elevated in recent years relative to historical standards, reflecting in part accommodative financing conditions at historically low rates.
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 ...