The Real Explanation of Nominal Bond-Stock Puzzles

Abstract

We present evidence that the mix of transitory and permanent shocks to consumption is changing over time. We study the implications of this finding for asset prices. The uncovered dynamics of consumption implies modestly upward sloping real bond and equity curves, upward sloping nominal yield curve, and sign-switching correlation between equities and bonds consistent with the stylized facts. This is 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. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.