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Author:Vazquez-Grande, Francisco 

Working Paper
Nominal Rigidities and the Term Structures of Equity and Bond Returns

A downward-sloping term structure of equity and upward-sloping term structures of interest rates arise endogenously in a general-equilibrium model with nominal rigidities and nonlinear habits in consumption. Countercyclical marginal costs exacerbate the procyclicality of dividends after a technology shock, and hence their riskiness, and generate countercyclical inflation. Marginal costs gradually fall after a negative technology shock as the price level increases sluggishly, so the payoffs of short-duration dividend claims (bonds) are more (less) procyclical than the payoffs of long-duration ...
Finance and Economics Discussion Series , Paper 2015-64

Working Paper
Measuring the Natural Rate of Interest : A Note on Transitory Shocks

We present evidence that the natural rate of interest is buffeted by both permanent and transitory shocks. We establish this result by estimating a benchmark model with Bayesian methods and loose priors on the unobserved drivers of the natural rate. When subject to transitory shocks, the median estimate for the U.S. economy is more procyclical, displays a less marked secular decline, and is therefore higher following the Great Recession than most estimates in the literature.
Finance and Economics Discussion Series , Paper 2017-059

Newsletter
Sources of Fluctuation in Short-Term Yields and Recession Probabilities

An inverted yield curve—defined as an episode in which long-maturity Treasury yields fall below their short-maturity counterparts—is a powerful near-term predictor of recessions. While most previous studies focus on the predictive power of the spread between the long- and short-term Treasury yields, Engstrom and Sharpe (2019) have recently shown that a measure of the nominal near-term forward spread (NTFS), given by the difference between the six-quarter-ahead forward Treasury yield and the current three-month Treasury bill rate, dominates long-term spreads as a leading indicator of ...
Chicago Fed Letter

Working Paper
Accounting for Risk in a Linearized Solution: How to Approximate the Risky Steady State and Around It

We propose a novel approximation of the risky steady state and construct first-order perturbations around it for a general class of dynamic equilibrium models with time-varying and non-Gaussian risk. We offer analytical formulas and conditions for their local existence and uniqueness. We apply this approximation technique to models featuring Campbell-Cochrane habits, recursive preferences, and time-varying disaster risk, and show how the proposed approximation represents the implications of the model similarly to global solution methods. We show that our approximation of the risky steady ...
Working Papers , Paper 22-14

Discussion Paper
Out-of-Sample Performance of Recession Probability Models

This note discusses the out-of-sample (OOS) performance of several probit models used to assess the likelihood that the U.S. economy will be in a recession within the following year.
FEDS Notes , Paper 2019-12-13-1

Discussion Paper
The Stock Market–Real Economy "Disconnect": A Closer Look

Between March and September 2020, broad equity price indexes around the world experienced a historic rally. Although this rally followed a significant decline in stock prices, it appears difficult to explain due to continuing concerns about the global pandemic and national economies running far below their potentials.
FEDS Notes , Paper 2020-10-14-2

Discussion Paper
Are Stocks Pricing in Recession Risks? Evidence from Dividend Futures

Since the beginning of this year, broad equity price indexes around the world have declined significantly. In interpreting the declines, market commentaries have highlighted the risks to the economic outlook in the United States and other advanced economies.
FEDS Notes , Paper 2022-08-18

Discussion Paper
Monetary Policy, Inflation Outlook, and Recession Probabilities

An inverted yield curve—defined as an episode in which long-maturity Treasury yields fall below their short-maturity counterparts—is a powerful near-term predictor of recessions. While most previous studies focus on the predictive power of the spread between long- and short-maturity Treasury yields, Engstrom and Sharpe (2019) have recently shown that a measure of the nominal near-term forward spread (NTFS), given by the difference between the six-quarter-ahead forward Treasury yield and the current three-month Treasury bill rate, dominates long-term spreads as a leading indicator of ...
FEDS Notes , Paper 2022-07-12

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