A credit-banking explanation of the equity premium, term premium, and risk-free rate puzzles

Arbeitspapier

Micro-founded de-centralized financial intermediation in a cash and costly-credit model(see Gillman and Kejak, 2008) results in a cost-distortion of returns implying a lower average nominal and real risk-free rate when compared to standard cash-in-advance RBC models. Failure of both short-run and long-run Fisher equation relationships based on observable real and nominal rates and inflation are obtained. The cost-distortion also leads to an unconditionally upward-sloping average yield curve of interest rates which is also convex in shape. The model is capable of producing a positive correlation between the nominal rate and velocity, and a negative correlation between the ex-post real rate and inflation. More importantly, the model also predicts a negative correlation between the ex-ante real rate and the ex-ante expected rate of inflation. Finally, the conditional spread between the usual CCAPM rate as defined by Canzoneri and Diba (2005) and the model-implied money market rate is positively correlated with the stance of monetary policy, offering a new perspective on this systematic link recently studied empirically by Canzoneri et al. (2007a) and theoretically by Canzoneri and Diba (2005).

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Cardiff Economics Working Papers ; No. E2008/30

Classification and Topics

• Classification: Wirtschaft ; Financial Markets and the Macroeconomy
• Subject: Business Cycles ; Money ; Term Structure of Interest Rates ; Inflationsrate ; Zinsstruktur ; Konjunktur ; Kapitalertrag ; Fisher-Effekt ; Theorie

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Scheffel, Eric
• Event: Veröffentlichung
• (who): Cardiff University, Cardiff Business School
• (where): Cardiff
• (when): 2008

Further information

• Handle: http://hdl.handle.net/10419/65812
• Last update: 10.03.2025, 11:43 AM CET