Are exogenous shocks to lending spreads in corporate credit markets a substantial source of macroeconomic fluctuations? An alternative explanation of the data is that borrowing costs respond endogenously to expectations of future default, driven by macroeconomic shocks. We investigate by...

From the macroeconomist's viewpoint, agent based modelling has an obvious drawback: it makes impossible to think in aggregate terms. The modeller, in fact, can reconstruct aggregate variables only “from the bottom up” by summing the levels of a myriad of individual variables. We propose a...

A model of heterogenous firms facing idiosyncratic risk is proposed which generates an equity premium of 6 per cent and a risk-free rate of 1.5 per cent even if aggregate returns are risk-free. The premium in this model reflects diminishing returns-to-scale and the fact that equity shares are...

We explore the role of evolving beliefs regarding the structure of the macroeconomy in improving our understanding of the term structure of interest rates within the context of a simple macro-finance model. Using quarterly vintages of real-time data and survey forecasts for the United States...

An extensive literature has analyzed the implications of hidden shifts in the dividend growth rate. However, corresponding research on learning about growth persistence is completely lacking. Hidden persistence is a novel way to introduce long-run risk into standard business-cycle models of...

In this paper we investigate the role of macroeconomic stabilization policies for the international transmission of productivity shocks and their effects on the external sector. We develop a two-country stochastic Dynamic New-Keynesian “perpetual youth” model of the business cycle with...

We assess the relation between the yield curve and the macroeconomy in the U.S. between 1961 and 2011. We add to the standard parametric macro-finance models, as we uncover evidence simultaneously on the time and frequency domains. We model the shape of the yield curve by latent factors...

This paper addresses the positive implications of indexing risky debt to observable aggregate conditions. These issues are pursued within the context of the celebrated financial accelerator model of Bernanke et al. (1999). The principal conclusions include: (1) the estimated level of indexation...

The term premium has become increasingly important in discussions of monetary policy formulation. This paper reviews two approaches to embedding a variable term premium into an otherwise standard modern DSGE model. The first approach maintains frictionless asset trade but alters preferences so...

We provide an extensive analysis of the predictive ability of financial volatility for economic activity. We consider monthly measures of realized and implied volatility from the stock and bond markets. In a dynamic factor framework, we extract the common long-run component of volatility that is...