The inflation risk premium on government debt in an overlapping generations model
نویسندگان
چکیده
An overlapping generations model with long run inflation risk and a cash-in-advance constraint is used to derive a second-order accurate closed-form solution for the inflation risk premium on long-term government debt. The model predicts that the inflation risk premium depends crucially on the relative importance of nominal bonds and capital as sources of retirement consumption. In a calibrated model the predicted risk premium is non-trivial under plausible levels of risk aversion. The cash-in-advance constraint is crucial for this result.
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